Asia Pacific Equity Strategy:Staples,another market darling,derates.Derating done?

Staples, another market darling, derates. In our report of 19 September Healthcare, a market darling, derates, we had highlighted Healthcare’s YTD underperformance of 9%. While MSCI Asia ex-Japan Staples have only underperformed MSCI Asia ex-Japan (MXASJ) by 2% YTD, Figure 1 highlights underperformance of 11% from the highs in May. More significantly, the underperformance has become more broad-based with Staples not only in MSCI China, but in India, Indonesia, Korea, Taiwan and the Philippines underperforming. It’s only in Thailand where Staples are continuing to outperform.

    Derating most advanced in MSCI China. While the P/ B of MSCI China Staples has derated from a high of 7.8x in 2010 to just 2.7x currently, Figure 3 highlights a further 5.1% cut to 2016E consensus EPS in September. We believe de-rating has only just begun in other markets with upgrades to 2016E consensus EPS in cyclicals being the key catalyst.

    Reiterate UNDERWEIGHT as Staples still looks unattractive. On our P/BV versus ROE valuation model, Staples are currently trading at a 112% premium to the region, double its historical average of just 60%.