Transcript Investment Outlook 2001

Investment
Outlook 2001
Daniel Chan
Managing Director &
Chief Investment Officer
UOB Asset Management Ltd.
1
Investment Outlook 2001
Contents
- What Happened in 2000
- The Issues in 2001
- Base Case Investment Scenario
- Outlook & Strategy
-
Global Bonds
-
US Equities
-
European Equities
-
Japan Equities
-
Asia ex-Japan
-
Singapore
- Conclusions
2
What Happened in 2000
1. Correction in the technology / telecom sector.
2. Tightening of US monetary policy.
3. Slowdown in US economy.
4. Sharp revision of corporate earnings.
5. The Euro “tanked”.
6. Spike in oil prices.
7. Asia equities did especially poorly.
3
NASDAQ Ruled...
Nasdaq Composite Index Price Trend in 2000
5500
Liquidity in high
yield financing
evaporates causing
bankruptcies
amongst US
emerging telcos
4500
4000
Tech stocks
correct on fears
that telcos cut
back in CAPEX
will hurt tel eqpt
food chain
Intel preannounces lower
than expected
results for Sep
quarter
US mutual funds
tax loss selling
pressure takes
effect
Semiconductor
and telecom eqpt
coys report
robust bookings
03 Sep
03 Aug
Apple reduced Q1
Baron's publishes 01 earnings
guidance
article on
excessive vendor
financing - fears of
Nortel reports
Cisco reports
CLEC default on
inventory build up
build up in
loan repayment
at US telcos
inventory
resurface
03 Jul
03 Apr
03 Feb
03 Jan
2000
03 Mar
UK UMTS licence
auction ends investors fear
telcos overpaid
2500
03 Jun
3000
Nokia lowers
Q3 margin
SSB’s Jonathan
Joseph calls an expectations investors fear
earlier end to
slowdown in
semiconductor
growth cycle cellular handset
demand
03 May
3500
Apple reduced Q1
01 earnings
guidance
03 Nov
5000
German UMTS
licence auction
ends - investors
fear telcos
overpaid
03 Oct
Optical coys revise up
earnings guidance
after strong Q4 00
results
Source: UOBAM
4
Fed Rate Hikes
16 May - 50 bp hike
21 Mar - 25 bp hike
2 Feb 25 bp hike
2000
1999
Source: Bloomberg
5
Fed Rate Hikes + Earnings Growth
6
Fed Rate Hikes + Earnings Growth
Source: Soc-Gen
7
Oil Price Rose
Source: Bloomberg
8
Asia Equities Did Poorly
Investments were flowing out of Asia dedicated funds.
Portfolio equity flows into Asia
Source: Goldman Sachs
9
What Happened in 2000
How the stock markets performed last year
-50.92
KOREA
THAILAND
-44.14
TAIWAN
-43.91
INDONESIA
-38.5
PHILIPPINES
-30.26
JAPAN
-27.19
-20.65
INDIA
SINGAPORE
-18.66
CHINA
-17.67
MALAYSIA
-16.33
HONG KONG
-11
UK
-10.21
USA
-10.14
GERMANY
-7.54
FRANCE
-0.54
0.07
AUSTRALIA
-60
-50
-40
-30
-20
-10
0
10
%
10
MSCI Far East Free Ex-Japan
Source: Bloomberg
11
Investment Opportunities in 2001
Down markets create opportunities...
Stock Market Valuations
Performance
December 31, 2000
in 2000
Trailing Valuation
P/BV
P/CE
P/E Valuation
Earnings Growth
PEG
2000
2001
2000
2001
2001
MSCI AC World Free
-15.1
3.6
15.3
23.0
20.9
26.0
10.0
2.1
MSCI USA
-13.6
-10.1
4.1
6.6
17.1
-
24.6
24.6
22.4
21.0
19.5
19.5
10.1
10.4
2.2
2.0
-3.5
3.0
11.1
20.9
19.5
20.5
6.9
2.8
MSCI Japan
-20.2
2.0
12.9
50.8
35.0
33.0
11.0
3.1
MSCI Asia Pacific
-26.0
1.8
8.3
15.0
12.7
50.6
18.0
0.7
MSCI Singapore free
-26.0
2.0
11.1
16.4
14.4
28.5
13.6
1.1
DBS 50
-18.7
2.5
18.3
17.0
15.4
20.0
10.5
1.5
S&P 500
MSCI Europe
ex Japan
Note : Perform ance in local currency
Source: MSDW
12
The Issues in 2001
- Will there be a hard landing ?
- Have the TMT sectors bottomed ?
13
The Issues in 2001
Will there be a hard landing ?
The case for :
– Negative wealth effect
– Investment boom (especially IT) over
– Consumer is tapped out
– Corporate debt build-up
14
The Issues in 2001
Will there be a hard landing ?
The case against :
– Room for interest rate cuts
– IT and other technological investment still
needed in a fiercely competitive environment
– Other policy options available (tax cuts, fiscal
stimulus, US dollar weakens)
– US economy remains highly competitive
15
The Issues in 2001
For a HARD LANDING scenario to happen, these must happen:
-
Core inflation rises rapidly, preventing a relaxation of
monetary policy,
-
Wage rise (labor costs) outstripping productivity growth,
-
Oil prices skyrocketing out of control,
-
Extreme risk aversion spreading to investment grade credits,
-
Occurrence of an unexpected and contagious event risk
that results in confidence flight.
Our conclusion is that the odds of this happening is smaller than
that of a SOFT LANDING.
16
The Issues in 2001
The Fed and the other central banks have room to cut
interest rates...
17
The Issues in 2001
Have the TMT sectors bottomed ?
18
Have the TMT Sectors Bottomed ?
Nasdaq Price Chart (1975 – 2000, logarithmic scale)
Between 1980 and 1990 : Index up +84.8%
Between 1990 and 2000 : Index up +560.8%
PE of NASDAQ Composite : 101.8x
19
Have the TMT Sectors Bottomed ?
Nasdaq Price Chart (1975 – 2000)
Between 1980 and 1990 : Index up +84.8%
Between 1990 and 2000 : Index up +560.8%
PE of NASDAQ Composite : 101.8x
20
Have the TMT Sectors Bottomed ?
• US technology sector is attractive relative to the
broad market
US Tech sector PEG (Fwd EPS) against US broad market
2.500
US Tech PEG 1.22x vs S&P 500 PEG 1.50x
2.000
1.500
1.000
l9
Ja 1
n
92
Ju
l9
Ja 2
n
93
Ju
l9
Ja 3
n
94
Ju
l9
Ja 4
n
95
Ju
l9
Ja 5
n
96
Ju
l9
Ja 6
n
97
Ju
l9
Ja 7
n
98
Ju
l9
Ja 8
n
99
Ju
l9
Ja 9
n
00
Ju
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Ja 0
n
01
Ju
l0
1
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Ja
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91
0.500
S&P500 PEG
IT PEG
Source: MSDW (Jan 01)
21
Have the TMT Sectors Bottomed ?
The NASDAQ 100 - Now closer to fair value
Source : Datastream
22
Have the TMT Sectors Bottomed ?
The tech bubble in perspective..
Source : The BCA
23
Have the TMT Sectors Bottomed ?
Valuation Statistics for Top 20 companies of NASDAQ 100
Stock Names
Cisco
Microsoft
Intel
Oracle
Qualcomm
Sun Microsystems
JDS Uniphase
Veritas
Siebel
Amgen
Voicestream
Immunex
Ciena
Nextel
Juniper
Xilinx
Applied Micro Circuits
Linear
Maxim Integrated
Worldcom
12 mth fwd P/E Exp EPS Growth
(x)
next 5 yrs (%)
41
32
26
20
21
20
60
26
57
36
36
23
45
47
95
46
86
43
47
19
n.a.
n.a.
125
55
105
39
n.a.
n.a.
136
55
31
28
86
41
33
26
37
29
16
14
PEG
(x)
1.3
1.3
1.1
2.3
1.6
1.6
0.9
2.1
2.0
2.5
n.a.
2.3
2.7
n.a.
2.5
1.1
2.1
1.3
1.2
1.1
24
Have the TMT Sectors Bottomed ?
Valuation Statistics for Top 20 companies of NASDAQ 100
Stock Names
Cisco
Microsoft
Intel
Oracle
Qualcomm
Sun Microsystems
JDS Uniphase
Veritas
Siebel
Amgen
Voicestream
Immunex
Ciena
Nextel
Juniper
Xilinx
Applied Micro Circuits
Linear
Maxim Integrated
Worldcom
12 mth fwd P/E Exp EPS Growth
next 5 yrs
41.35
31.7
25.65
19.7
21.1
19.5
59.5
25.8
57.3
35.7
36.0
23.0
44.6
47.4
95.1
45.5
86.4
42.9
47.4
18.6
14.3
n.a.
124.6
55.0
104.8
39.3
37.9
n.a.
136.2
55.3
30.8
28.1
85.5
41.4
32.65
26.1
36.5
29.3
15.8
14.4
PEG
1.3
1.3
1.1
2.3
1.6
1.6
0.9
2.1
2.0
2.5
n.a.
2.3
2.7
n.a.
2.5
1.1
2.1
1.3
1.2
1.1
25
TMT Valuations - US
US
Companies
Worldcom
15.8
Nortel
Corning
JDS Uniphase
Sun Microsystems
EMC
Microsoft
AOL Time Warner
Intel
PMC Sierra
Broadcom
Applied Materials
Broadvision
Yahoo
2001
PER
1.0
33.7
35.2
37.1
32.1
62.7
24.1
73.0
21.1
42.0
61.0
13.0
40.2
49.7
Price/
Book
13.4%
4.4
5.6
1.7
10.9
18.8
5.8
11.0
5.7
14.6
8.9
5.6
2.6
8.3
Expected EPS
growth (00-05)
7.5%
25.9%
27.4%
47.4%
23.0%
30.1%
19.7%
25.0%
19.5%
44.0%
46.0%
24.0%
50.9%
44.2%
Implied EPS
growth (00-05)
20.5%
22.2%
24.5%
16.0%
26.0%
23.0%
21.0%
8.0%
17.0%
32.0%
1.0%
24.0%
28.2%
Prices as of 5 Jan 01
26
TMT Valuations - Europe
Europe
Companies
Nokia
Alcatel
Autonomy
Vodafone
Deutsche Telekom
France Telecom
2001
PER
43.7
31.8
79.0
44.4
43.1
37.9
Price/
Book
29.3
5.2
28.0
1.1
3.0
5.0
Expected EPS
growth (00-05)
25.0%
31.4%
50.0%
30.0%
10.0%
16.5%
Implied EPS
growth (00-05)
22.5%
15.2%
35.3%
24.8%
16.7%
8.1%
Prices as of 5 Jan 01
27
TMT Valuations - Japan
Japan
Companies
Murata
Tokyo Electron
NTT DoCoMo
Fujitsu
Trend Micro
Sony
Net One Systems
Nippon System Development
2001
PER
24.5
19.3
47.5
164.5
87.3
52.4
75.2
59.9
Price/
Book
5.9
4.7
10.8
2.7
29.1
3.6
19.6
9.7
Expected EPS
growth (00-05)
23.0%
18.3%
18.0%
18.0%
26.0%
16.0%
23.0%
26.0%
Implied EPS
growth (00-05)
12.0%
10.0%
9.0%
19.0%
19.0%
12.5%
15.5%
21.5%
Prices as of 5 Jan 01
28
TMT Valuations - Asia ex-Japan
Asia
Companies
China Mobile
PCCW
Korea Telecom
SK Telecom
Taiwan Cellular Corp
Infosys
Gul Technologies
Venture Manufacturing
TSMC
HK TVB
2001
PER
27.0
25.0
20.0
21.0
9.0
42.0
10.0
22.0
13.0
22.6
Price/
Book
10.4
3.9
1.6
6.4
5.8
50.7
2.2
7.4
7.4
7.8
Expected EPS
growth (00-05)
26.0%
11.0%
14.0%
25.0%
17.0%
52.0%
22.0%
22.0%
23.0%
18.9%
Implied EPS
growth (00-05)
18.0%
22.0%
11.0%
15.0%
-6.0%
50.0%
-10.0%
11.0%
5.0%
15.5%
Prices as of 5 Jan 01
29
Base Case Investment Scenario
1. A soft landing for the global economy - with
the slowdown led by the US.
2. Inflation to remain subdued.
3. Interest rates to fall in 2001.
4. Oil prices to stabilize at current levels.
30
Bond Market Outlook
Expect lower rates ...
31
Bond Market Outlook
Credit spreads are attractive...
32
Bond Market Outlook
What the Fed Funds Futures are forecasting?
• US Fed Funds futures are already forecasting almost 1%
cut in Fed Funds rate by end Aug 2001
33
Bond Market Outlook
Rates anticipation
• Bond yields have
already priced in a soft
landing
• Unless there is a hard
landing, further yield
decline would be a
overreaction
• Therefore yields are
likely to stay close to
current levels unless the
economic scenario
worsens
• However, reality tells us
there will always be
overreaction
34
Bond Market Outlook
EMBI+ Spread Index
The emerging sovereign spread has widened despite
improving fundamentals …….
35
Bond Market Outlook
US Real Yields - Little room to fall
Source: Bloomberg
36
Bond Market Strategy
• Bond yields do not have much room to fall
• Slightly below benchmark duration
• Opportunities in good quality investment
credits
• Emerging sovereign credits to outperform
high yield corporate bonds
37
Equity Market Strategy
1. At current levels, equities have adequately
discounted the risks, and are well underpinned
by more reasonable valuations.
2. Stay invested and stay diversified - equities are
attractive in a soft landing scenario.
3. Equity market strategy:
US
Europe
Japan
Asia ex-Japan
Underweight
Neutral
Neutral
Overweight
38
Equity Market Strategy
4. Sector Strategy
-
Financials and interest rate sensitive sectors
should benefit from lower rates.
-
Healthcare - the consistent growers, resilient
to earnings disappointment.
-
Technology & Telecom - selective in telecom
and tech fallen angels.
39
US Equities - Underweight
Economic growth is slowing to
a more moderate pace - we are
looking for a soft landing for
the US economy
US companies’ profit
growth will also slow
40
US Equities - Underweight
Fourth quarter companies’
earnings will be weak, partly
hurt by weaker consumer
spending
And expectations of
lower capital spending
41
S&P500 P/E
Jul 93
S&P500 PEG
Jul 00
Jan 00
Jul 99
Jan 99
Jul 98
Jan 98
Jul 97
Jan 97
Jul 96
Jan 96
Jul 95
Jan 95
Jul 94
Jan 94
1.000
Jan 93
S&P 500 PER (fwd P/E) vs Mean
Jul 92
5.00
Jul 91
1.200
Jan 92
10.00
Jan 91
15.00
Jul 90
25.00
Jan 90
Jul 00
Jan 00
Jul 99
Jan 99
Jul 98
Jan 98
Jul 97
Jan 97
Jul 96
Jan 96
Jul 95
Jan 95
Jul 94
Jan 94
Jul 93
Jan 93
Jul 92
Jan 92
Jul 91
Jan 91
Jul 90
Jan 90
US Equities - Underweight
PER and PEG of US Stocks (S&P 500)
S&P500 PEG (Fwd EPS) vs Mean
2.000
20.00
1.800
1.600
1.400
0.800
Mean
Mean
42
US Equities - Underweight
Source : SocGen
43
US Equities - Underweight
Source : SocGen
44
US Equities - Underweight
Mutual fund cash levels have risen back to its mean.
45
US Equities - Underweight
No excess capacity outside technology
Source : The BCA
46
European Equities - Neutral
–
Warning signs of a slowdown in the economy
47
European Equities - Neutral
–
But there is also more leeway for expansionary fiscal policy
Budget Surplus/Deficit (% of GDP)
2.0
1.0
0.0
-1.0
Euroland
USA
Japan
-2.0
-3.0
-4.0
-5.0
-6.0
-7.0
-8.0
1998
1999
48
European Equities - Neutral
–
More room for looser monetary policy, and
Euro Heading Higher
Trend Reversal
49
European Equities - Neutral
Stock valuations are not demanding
MSCI Europe
50
Japan Equities - Neutral
Economic growth momentum slowing …. as indicated by industrial
production (leading indicator of GDP) slowing down.
51
Japan Equities - Neutral
52
Japan Equities - Neutral
“Strategic” Restructuring – More M&As and asset disposal instead of
layoffs. But at the corporate level, restructuring continues, which is
positive for the market.
No. of restructuring announcements
35
Employee cut
Asset disposal
M&A
30
25
20
15
10
5
Source: HSBC
Nov-00
Sep-00
Jul-00
May-00
Mar-00
Jan-00
Nov-99
Sep-99
Jul-99
May-99
Mar-99
Jan-99
Nov-98
Sep-98
Jul-98
0
53
Japan Equities - Neutral
(￥bn)
Foreign Net Buying (monthly)
TOPIX (RHS)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
-200
-400
-600
-800
-1000
1,800
1,600
1,400
Foreigners have been
the ones that drove
the market. This
chart suggests that
the market is
bottoming.
1,200
1,000
94
95
96
97
98
99
00
Source: HSBC
54
Japan Equities - Neutral
Valuations provide support
4,000
PER levels calculated using one-year rolling forward
IBES EPS forecasts
3,500
3,000
PER 55x
2,500
PER 45x
2,000
TOPIX
1,500
PER 35x
1,000
500
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Going back to valuations, mkt looks cheap
Over past 12 years, floor = 35X = 1450 on TOPIX
PER lowest 31X in Oct98 =1300
55
Japan Equities - Neutral
Japan has huge catch-up potential
Source : The BCA
56
Asia ex-Japan - Overweight
The investment case for Asia ex-Japan:
–
Favorable liquidity conditions
 Healthy current account balance
 Mild inflation
 Low interest rates
–
Increasing trend of M&A and privatization
–
Prime beneficiary of outsourcing trend
–
China’s WTO accession in 2001
–
Compelling valuations
57
Asia ex-Japan - Overweight
Healthy current account balance
4.0%
US
Japan
EMU11
Non-Japan Asia
2.9%
3.0%
2.5%
2.4%
1.7%
2.0%
1.0%
0.0%
-0.6% -0.7%
-1.0%
-1.4%
-2.0%
-1.9%
-3.0%
2000F
2001F
Source: Goldman Sachs
58
Asia ex-Japan - Overweight
Inflation under control
% Yr
% Yr
North Asia
8
60
6
50
4
40
2
30
0
20
1999
1998
2000F
2001F
-2
10
-4
0
-6
-10
China
Hong Kong
Korea
South Asia
Taiwan
1998
1999
2000F
2001F
Indonesia
Philippines
Singapore
Thailand
Source: HSBC Securities
59
Asia ex-Japan - Overweight
Scope for lower interest rates
% EOP, 3M
% EOP, 3M
North Asia
8.0
45.0
7.0
40.0
6.0
35.0
South Asia
30.0
5.0
25.0
4.0
20.0
3.0
15.0
2.0
10.0
1.0
5.0
0.0
0.0
1998
China
1999
Hong Kong
2000F
Korea
2001F
Taiwan
1998
1999
Indonesia
Philippines
2000F
Singapore
2001F
Thailand
Source: HSBC Securities
60
Asia ex-Japan - Overweight
Asia-5* : Loan-to-deposit ratio - Still very low
Source : The BCA China Analyst
61
Asia ex-Japan - Overweight
Restructuring and M&A continue apace
•
Increasing trend of M&A activity across Asia. Expect
more M&A transactions to follow, particularly in the
telecom and financial services sectors.
•
Privatization within Asia are helping to drive
restructuring.
Source: Goldman Sachs
62
Asia ex-Japan - Overweight
Prime Beneficiary of Outsourcing Trend
• Slowing US investment may trigger defensive
strategies by OEMs - by increasing outsourcing,
which benefits Asian Electronic Contract
Manufacturers.
CAGR (%)
63
Asia ex-Japan - Overweight
WTO Boosts FDI Inflows
• China’s accession into WTO offers substantial
opportunities for corporate leaders which will
lead the consolidation or deregulation of major
industries.
Source: Soc-Gen
64
Asia ex-Japan - Overweight
There has been a dramatic shift in market shares
among Asian competitors for US imports
Source : The BCA China Analyst
65
Asia ex-Japan: Compelling Valuations
•
Asian markets have priced in significant earnings slowdown.
•
Valuations are back to crisis levels although fundamentals
remain intact.
Forward P/E ratio and implied market performance
Forward P/B ratio and implied market performance
Earnings yield gaps and implied market performance
Note: The above numbers are based on Datastream index levels for the respective markets as at 19 Dec 2000
Source: CSFB 66
Asia ex-Japan: Compelling Valuations
1999
MSCI Asia Pacific Free ex Japan
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
23.0
11.6
25.3
nm
13.3
20.0
17.5
21.0
19.2
nm
PER (x)
2000F 2001F
15.3
6.7
18.0
9.7
7.6
17.1
17.9
16.4
12.8
13.2
13.0
6.6
15.8
7.1
5.8
14.0
13.7
14.4
12.0
12.3
PBV
EV /
EPS Growth
2000F EBITDA 1999 2000F 2001F
1.7
0.7
2.1
2.0
1.0
1.7
1.2
1.8
2.0
1.3
12.7
5.7
15.3
12.7
11.5
12.3
10.9
13.6
15.4
8.9
64.5%
71.9%
16.1%
nm
nm
nm
7.1%
140.3%
33.3%
nm
50.6%
17.0%
40.3%
nm
75.3%
17.0%
-2.4%
28.5%
50.1%
nm
18.0%
2.0%
13.9%
37.3%
32.1%
22.0%
30.7%
13.6%
7.0%
7.3%
PEG (x)
1999 2000F 2001F
0.4
0.2
1.6
nm
nm
nm
2.5
0.1
0.6
nm
0.3
0.4
0.4
nm
0.1
1.0
(7.5)
0.6
0.3
nm
0.7
3.3
1.1
0.2
0.2
0.6
0.4
1.1
1.7
1.7
Source: MSDW, ABN Amro
67
Asia ex-Japan - Overweight
Investment Strategy
•
Overweight:
Singapore, China & Hong
Kong, Korea
•
Neutral:
Taiwan
•
Underweight:
Thailand, Indonesia,
Philippines & Malaysia
68
Asia ex-Japan - Overweight
Asia ex-Japan Stock Picks
PER (x)
NAME
PEG (x)
EST. L-T
P/BV
PRICE
%
FY00
FY01
FY00
10.0
9.0
0.4
0.4
22.4
1.0
6.60
40%
8.1
7.2
0.5
0.5
15.1
1.8
130,000
82%
4.03
13.6
11.5
0.2
0.2
68.0
4.6
5.00
24%
HONG KONG EXCHANGES & CLEAR HKD
18.45
21.7
19.0
1.3
1.1
17.1
n/a
21.00
14%
INFOSYS TECHNOLOGIES LTD
INR
5,970
66.3
39.5
1.3
0.8
51.6
47.4
7,500
26%
WINBOND ELECTRONICS CORP
TWD
40.20
11.4
8.1
0.4
0.3
27.3
2.2
75.00
87%
UNIVERSAL SCIENTIFIC INDUSTR
TWD
22.70
7.1
6.3
0.2
0.2
40.0
1.7
36.00
59%
PRICE
DELGRO CORPORATION LTD
SGD
CHEIL COMMUNICATIONS INC
KRW 71,500
GIORDANO INTERNATIONAL LTD
HKD
4.70
FY01 GROWTH (%)
(x)
TARGET UPSIDE
69
Singapore Equities - Overweight
Review
•
Singapore outperformed the region in the last quarter of 2000.
•
Sector performance (relative to STI)
Outperformed
Properties
5.6%
Transportation
5.5%
Electronics
Financials
Underperformed
6.1%
0.7%
Source: Bloomberg
70
Singapore Equities - Overweight
• We are overweight Singapore in our Asia-Ex-Japan portfolio.
Investment Rationale
• Safe-haven status.
•
High earnings stability (14% earnings growth in 2001 following
a high 29% in 2000), low gearing, and still improving ROEs.
•
Good corporate governance.
•
Significant restructuring expected in the banking and
conglomerate sectors - this will drive margin expansion and
greater capital efficiency.
•
Domestic liquidity is good with interest rates low, the banking
sector's loan-to-deposit ratio low and the potential for US rates
to fall further.
71
Singapore Equities - Overweight
Investment Rationale
• Equity earnings yield are more attractive than rate of return on
alternative investments.
• Valuations are attractive at current and forward PE multiples of
16x and 14x respectively, with positive earnings yield gap.
72
Singapore Equities - Overweight
Investment Risks
•
Political uncertainties in surrounding countries.
•
A significant slowdown in electronics exports to the US.
•
Little room for S$ interest rates to fall as they are already quite
low .
Source: CLSA
73
Singapore Equities - Overweight
Sector and Stock Picks
Sector
O/U/N Stocks
Remarks
Banking
O/W
UOB, OCBC Divestment of non-core assets
over next 1-2 years hold key to
releasing liquidity back into
banking system. As local banks
focus on search for strategic
partnerships or new markets,
any positive news is expected to
drive up share prices.
Conglomerates
O/W
SCI
One of the main proponents of
corporate restructuring as
management strives to improve
capital management and focus
on delivering shareholder value.
74
Singapore Equities - Overweight
Sector and Stock Picks
Sector
O/U/N Stocks
Remarks
- residential
U/W
- commercial
N
}
}
} City Dev
} Capitaland
}
}
Private residential housing demand
remains anemic. Prices expected
to fall 10-15% this year.
Demand supply mismatch in office
properties expected to lead to tight
rental market until 2002.
Technology
N
Elec & Eltek
Venture
Pockets of strength in industry
which is facing lower demand in
all its major segments. Prefer
companies with strong business
proposition (low cost, high quality).
Property
75
Singapore Equities - Overweight
Sector and Stock Picks
Sector
O/U/N Stocks
Transportation O/W
SMRT,
Delgro
Remarks
Earnings stream underpinned by
low base demand for public
transportation as well as lower oil
prices this year.
76
Strategy & Outlook
SECTOR STRATEGY
77
Financial Services
The long run outlook for the financial sector remains
positive. However, near term upside potential in the
financial stocks is capped by asset quality concerns.
Financials Performance vs. Interest Rate Cycle (1995-2000)
180
8
160
140
7
120
100
6
80
60
5
40
20
4
1/
31
/9
4/ 5
28
/9
7/ 5
31
10 /95
/3
1/
9
1/ 5
31
/9
4/ 6
30
/9
7/ 6
31
/
10 96
/3
1/
9
1/ 6
31
/9
4/ 7
30
/9
7/ 7
31
10 /97
/3
1/
9
1/ 7
30
/9
4/ 8
30
/9
7/ 8
31
10 /98
/3
0/
9
1/ 8
29
/9
4/ 9
30
/9
7/ 9
30
/
10 99
/2
9/
9
1/ 9
31
/0
4/ 0
28
/0
7/ 0
31
10 /00
/3
1/
00
0
SPXF INDEX
FDTR INDEX
78
Financial Services
Asset Quality Concerns
We recognized that NPAs are creeping up and do not rule out
the possibility of a credit cycle. However the situation is in a
better condition as compared to the 1991 recession. The strong
earnings of the banks over the last few years will enable them
to be resilient to the increase in NPAs.
20%
2.5%
2.0%
15%
1.5%
10%
1.0%
5%
0.5%
0%
0.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
% Classified & Spec. Mention Credits
% NPA's
79
Healthcare
Defensive sector and stable earnings growth
US pharmaceutical companies earnings hold steady
while S&P 500 earnings are coming off.
We are here
Source: SalomonSmithBarney
80
Healthcare
Healthcare stocks outperform when its growth rate
surpasses the market.
We are here
Source: SalomonSmithBarney
Note: Bars represent the difference in growth rate between the pharmaceutical sector and the S&P 500
81
Healthcare
Still Positive on Healthcare:
– Secular outlook also intact,
– driven by the aging global population,
– rising health care spending and
– technological advances.
82
Technology/Telecom
• Lower earnings visibility in general for 2001
– Downgrades should continue into H1 01
– Demand / supply imbalance biased against
demand
• Telecoms sector over-geared
– Credit problems may worsen for telecoms
– Pricing pressures hurt fixed line operators
– Mobile operators face increasing competition
• Tech sector growth intact albeit slower pace
– Further CAPEX cuts expected
– Increased vendor financing raises concerns
over credit quality
83
Technology/Telecom
• Valuations begin to look attractive
US Tech sector PEG (Fwd EPS)
against 10yr mean
US Telecoms sector PEG (Fwd EPS)
against 10yr mean
2.7000
2.30
2.3000
1.80
1.9000
1.30
1.5000
0.80
1.1000
Current PEG 1.22x vs 10yr mean 1.23x
Current PEG 1.74x vs 10yr mean 1.62x
Jul 01
Jan 01
Jul 00
Jan 00
Jul 99
Jan 99
Jul 98
Jan 98
Jul 97
Jul 96
Jan 97
Jul 95
Jan 96
Jul 94
Jan 95
Jul 93
Jan 94
Jul 92
Jan 93
Jul 91
Jan 92
Jul 01
Jan 01
Jul 00
Jul 99
Jan 00
Jul 98
Jan 99
Jul 97
Jan 98
Jul 96
Jan 97
Jul 95
Jan 96
Jul 94
Jan 95
Jul 93
Source: MSDW (Jan 01)
Jan 94
Jul 92
Jan 93
Jan 92
Jul 91
Jan 91
0.30
Jan 91
0.7000
Source: MSDW (Jan 01)
84
Technology/Telecom
•
Long term growth trends still intact
– IT spending will remain an important driver of
productivity
– Broadband growth will accelerate
– Alternate internet access devices becoming
more widespread
– Outsourcing trend will pick up
85
Investment Outlook - Conclusions I
– Base case scenario - soft landing of US economy
but risk of recession not insignificant.
– TMT sector bottoming out but some areas still
vulnerable. On the other hand, certain stocks
looking very attractive.
– US dollar has likely peaked against the Euro.
– Japanese recovery stalling and risk of recession
increased.
86
Investment Outlook - Conclusions II
– The economic outlook is cloudy but unlikely
to be disastrous.
– Forecasting economic conditions is difficult
enough. Even more difficult is predicting
how markets will behave.
– Therefore, focus on long term investing and
stock selection.
– Fundamentals and valuation do matter.
87
Investment Outlook 2001
OUR CONCLUSION - A BETTER 2001.
88