Asia Strategy:Turning points

Fund flows have improved

    Positive fund flows have seen the MSCI Asia ex-Japan Index (MXASJ) outperform the MSCI World Index by 2.5% over the past month. Having underperformed the MSCI World Index by 23.5% since the start of 2013, Asia ex-Japan looks cheap now.Trading at a 12-month forward PBR of 1.35x (1SD below its long-term mean) and at 11.2x 2014E earnings (vs. its past 6-year average of 11.7x), we do not rule out a further fund flow-driven rally in the next 1-2 months.

    Fundamentals in China, however, have not improved. Despite better loan growth in May and the recent

    Stocks added to the Conviction Buy list

    reserve requirement ratio (RRR) cut, we believe the country’s currency, credit, and property markets are all at tipping points. China property (now 30% of China GDP) is likely to be the first twig to snap with severe ramifications for the economy (and that of Hong Kong). We downgrade China to Underweight (from Neutral) and keep Hong Kong at Underweight.

    Other Underweight is the Philippines where, at 18.9x FY14E consensus earnings, valuations look stretched.

    Prefer Korea, Taiwan, Malaysia

    Given our bearish macro outlook for most of Asia ex-Japan, we prefer the G3 growth-led markets of Korea and Taiwan. 2014E EPS growth for Korea (22.2% YoY) and Taiwan (14.2% YoY) both exceed the Daiwa and Thomson Reuters consensus EPS growth forecast of 12.5% YoY for the MXASJ. Malaysia remains our preferred ASEAN market given its solid current-account surplus.

    We upgrade Thailand to Overweight (from Underweight) ahead of a likely 2015 rally given that the post-coup National Council for Peace and Order (NCPO) ruling body seems to be making a number of proeconomic- growth announcements.

    We upgrade India to Neutral (from Underweight) due to Prime Minister Modi’s reform agenda and strong FY14 forecast earnings growth of 15.1% YoY. But the recent market rally leaves 0.5% downside to our end-2014 MSCI India index target of 958, so we do not recommend chasing India stocks at these levels.

    Top Buys

    We add 8 stocks to our Conviction Buy list (see table below). We add 1 Conviction Sell and 4 Alpha (non- MXASJ) picks.

    New Pan Asia theme

    Led by a pick-up in demand for smartphones in China, the idea originates with Advantest in Japan and has implications for TSMC (2330 TT, TWD124.50, Outperform [2]) and MediaTek in Asia (2454 TT, TWD500, Buy [1]).