63 - Greed & Fear - Investment Style Shift - 27032014

Christopher Wood christopher.wood@clsa.
com +852 2600 8516

Thursday, 27 March 2014 Page 1
Investment style shift?
Jakarta
The most interesting point about Janet Yellens first Fed press conference last week is that the
yield curve flattened as monetary tightening expectations were brought forward after
Chairwoman Yellens impromptu response to a question when she stated that the Fed may raise
rates about six months after ending security purchases. Thus, the 10-year and 30-year
Treasury bond yields have fallen by 8bp and 11bp respectively since 19 March, while the 2-year
yield has risen by 2bp (see Figure 1). GREED & fear assumes this is not what the new Fed head
had intended.
Figure 1
US 30-year and 2-year Treasury bond yield spread

Source: CLSA, Bloomberg
Figure 2
NYSE margin debt balance as % of S&P500 market cap

Source: CLSA, NYSE, Datastream
Meanwhile, the obvious internal divisions within the Fed will become very evident if the
American economy fails to accelerate as anticipated following the first quarter weather related
lull. If that happens the doves like Yellen will want to end tapering but the hawks will not.
But even the so-called hawks will have second thoughts if market action turns decidedly risk
off in terms of a further rally in the bond market and a fall in the stock market. GREED & fear
certainly remains nervous about the US stock market given that margin debt is near record
levels relative to market capitalisation and given that hot sectors like biotech, fuel cells and
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NYSE margin debt as % of S&P500 market cap
Prepared for EV: shailendra.kirtikar@ca-suisse.sg

Christopher Wood christopher.wood@clsa.com +852 2600 8516

internet have begun to sell off. Thus, the NYSE margin debt balance rose by 24%YoY to a
record US$451bn in January. This is equivalent to 2.8% of S&P500 market capitalisation,
compared with a peak of 2.9% reached in 2008 (see Figure 2). Meanwhile, the Nasdaq Internet
Index and the S&P500 Biotechnology Index have fallen by 11% and 11.4% respectively since
peaking in early March and late February (see Figure 3). As for other hot areas like fuel cell
stocks, Plug Power and FuelCell Energy have fallen by 37% and 39% since peaking on 10
March (see Figure 4).
Figure 3
Nasdaq Internet Index and S&P500 Biotechnology Index

Figure 4
FuelCell Energy and Plug Power share prices

This is also an issue for investors in Asia ex Japan. In terms of themes that have been working,
last year was very concentrated with, in particular, buy-side concentrated positioning in the
likes of Chinese internet and Macau. But of late such themes have also stopped outperforming
(see Figure 5). In the case of Chinese internet, there is also the obvious excuse to take profits
provided by the pending US initial public offering for Alibaba now scheduled for the third quarter,
with talk of a listing valuing the company at US$200bn. While given the parabolic moves that
have been seen in some of the Chinese internet names over the past year, stocks can fall a long
way and still be in an upward trend technically. Thus, to take the example of Tencent, CLSAs
technical analyst Laurence Balanco noted this week that the stock could decline to HK$439, or
31% below its peak price reached in early March and 16% below todays price, and still be in
an uptrend (see Figure 6).
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Figure 5
Tencent and Galaxy Entertainment relative to MSCI AC Asia ex-Japan Index

Source: CLSA, Datastream
Figure 6
Tencent share price and 200-day moving average

GREED & fear raises this point simply to highlight the obvious risk of more of a correction. But
for those investors less short term orientated GREED & fear still takes the view that Chinese e-
commerce remains an exciting growth story where the real issue is who is going to win the
competitive battle as all these various players business models now converge on the ubiquitous
smart phone, a device owned by seemingly everyone save for GREED & fear and, for now at
least, emerging market domestics. By contrast the traditional side of Chinese equities, be it
financial stocks, property related stocks or investment-driven stocks such as cement and steel,
still face the deflationary risks posed by the overhang of maturing wealth management
products (WMPs) coming due later this year and next. The amount of WMPs that will become
due is estimated to exceed Rmb2tn in 2H14 and Rmb3.6tn in 2015, according to China Reality
Research.
True, the latest negative PMI reading from China this week (see Figure 7) could be the signal
that it has become time for renewed easing by Beijing, as seemingly happened last year, even
though it would be contrary to the current leaderships rhetorical focus on reform. But GREED
& fear is not going to try to play the low quality rally that could result from such a policy move
and will remain underweight China. Indeed the underweight in China in the relative-return
portfolio will be increased by one percentage point this week with the money added to India
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Galaxy Entertainment relative to MSCI AC Asia ex-Japan
Tencent relative to MSCI AC Asia ex-Japan
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(HK$)
Tencent share price
200-day mov avg


(see Figure 18). There is also the not irrelevant issue that the renminbi has begun to depreciate,
a trend that could well continue (see Figure 8).
Figure 7
Markit China Manufacturing PMI

Source: Markit Economics
Figure 8
Renminbi/US$ (inverted scale)

Meanwhile, in terms of country based weightings, GREED & fears guess is that many investors
focused on Asia ex Japan began the year overweight the likes of Korea, China and Taiwan on
the view that these markets were less negatively exposed to US cyclical recovery and
tapering. But so far this year two of the best performers have been Indonesia and India,
market moves driven to a significant degree by growing optimism on pending elections. Thus,
the MSCI India and Indonesia indices have risen by 5% and 19.5% in US dollar terms so far in
2014, compared with a 1.2% decline in the MSCI AC Asia Pacific ex-Japan Index (see Figure 9).
This is a reminder that, in the world of investing in emerging markets, sometimes politics can
be the only thing that matters at least in the short to medium term. Since GREED & fear shares
the optimism on the forthcoming polls in both countries and since these elections are not about
to happen tomorrow, GREED & fear recommends playing the momentum and staying
overweight both.
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Figure 9
2014 MSCI Asia indices performance in US$ terms

GREED & fear has been in Jakarta this week and it is clear that there is growing confidence that
Jakarta Governor Joko Jokowi Widodo will win the presidential election scheduled to be held
on 9 July. Indeed in what GREED & fear would view as a sign of somewhat out-of-touch
desperation, his chief rival former general Prabowo Subianto of the Gerindra Party felt it
necessary to enter a crowded stadium on horseback on Sunday before making a speech
characterised by resource nationalism (see Jakarta Post article Prabowo grandstands in his
partys military-style rally, 24 March 2014).
Figure 10
Current seat breakdown in Indonesian parliament

Note: Total 560 seats. Source: CLSA, DPR
But if all the momentum is with Jokowi the near term focus is on the parliamentary elections
next month where there are rising hopes that PDI-P can win up to 30-35% of the seats in the
parliament compared with the partys current 17% (see Figure 10). If this turns out to be the
case it would mean that an elected Jokowi, who will be the PDI-Ps candidate in the presidential
election, will be much better positioned to manage the legislature. This would in turn give him a
much better chance of making progress on infrastructure which, given the end of the
commodity boom, is an obvious catalyst required to drive the next growth cycle in Indonesia.
This issue is discussed at length in a report published last month by CLSAs head of Indonesia
research Sarina Lesmina (Indo infrastructure - Block by block: Technocrats get things rolling,
21 February 2014).
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YTD 2014 MSCI Asia indices performance in US dollar terms (%YTD)
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The report highlights the positive point that government spending on infrastructure has finally
started to rise meaningfully in recent years, increasing from 1.3% of GDP in 2010 to 1.9% of
GDP in 2013. It also notes the negative point that Indonesia has one of the highest logistics
cost in Asean as a percentage of GDP, based on World Bank methodology. Thus, logistics cost
rose from 24% of GDP in 2012 to 27% in 2013 (see Figure 11). Still there are some signs of
progress. The hope, if not yet quite the reality, is that a new 727km double-track railway will
open in the next few months linking Jakarta and Surabaya. This would be very significant given
the absence of an efficient road network across Java. It is also the case that Jokowi has also
demonstrated that he can act on infrastructure during his short 17-month tenure as Jakarta
Governor. GREED & fear refers to the fact that MRT construction has finally actually commenced
in the capital after being a perpetual virtual concept since 1986. The project is Japanese
funded.
Figure 11
Logistics costs as as percentage of GDP (2013)

Source: World Bank - State of Logistics Indonesia 2013
Figure 12
Indonesia current account balance

Source: CLSA, CEIC Data, Bank Indonesia
Meanwhile, there has been a revival of investor confidence in Indonesia so far this year as the
currency has stabilised in the context of an improvement in the current account primarily
caused by weakening imports. Thus, the current account deficit decreased from US$8.5bn or
3.9% of GDP in 3Q13 to US$4bn or 2% of GDP in 4Q13, the smallest deficit since 1Q12 (see
Figure 12). Similarly, imports declined by 6.9%YoY in 4Q13 and were down 3.5%YoY in January.
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Indonesia quarterly current account balance
as % of GDP (RHS)


The government projects that the current account deficit should decline this year to an average
2-2.5% of GDP range, compared with last years 3.3%, in the context of real GDP growth
running around 5.5%. One reason GREED & fear agrees growth is unlikely to be too weak is
because of the holding of parliamentary and presidential elections this year since election
spending is a natural positive for consumption. It is certainly the case that the consumption
trend has also so far proved remarkably resilient in the context of last years 175bp rise in
interest rates, a 44% domestic fuel price hike and rising prices of imported goods because of
the rupiahs 21% depreciation against the US dollar in 2013. Thus, real private consumption
growth held above 5% QoQ annualised for the ninth consecutive quarter in 4Q13. It would
seem to be the case that large wage increases have been a factor here. The Jakarta minimum
wage rose by 44% last year and is up 11% this year, while the nationwide average minimum
wage was raised by 19% last year and 21% this year. As a result, the average urban wage
increased by 18% in 2013 and is projected by CLSAs economics team to rise by 7% this year.
Figure 13
Bank Indonesia consumer confidence index

Source: CEIC Data, Bank Indonesia
Figure 14
Indonesia total system credit growth and consumer credit growth

Source: Bank Indonesia, CLSA
Consumer confidence indicators have also risen in recent months. Bank Indonesias consumer
confidence index has increased from a recent low of 107.1 in September 2013 to 116.2 in
February (see Figure 13). Still there has been an undoubtedly healthy slowdown in consumer-
related lending. While bank credit growth in aggregate decelerated to 20.9% YoY in January,
down from 23.1% YoY at the end of 2012, consumer-related credit growth slowed much more
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rapidly to 11% YoY in 4Q13, down from 45% YoY in 4Q12 (see Figure 14). Consumer related
loans now account for 22% of total bank loans.
Meanwhile, to return to the infrastructure theme, it is clear to GREED & fear and everyone else
that, in order to finance infrastructure, the government has to cut energy subsidies further if it
wants to retain its long self-imposed fiscal deficit target of 2.5% of GDP. There is room to cut
since there is still, despite last years cut, a 40% gap between the market fuel price and the
subsidised price. The ideal policy would be some sort of self-adjusting mechanism linking local
fuel prices to the global price. A positive point is that Jokowi has made it clear during his time
as Jakarta governor that he is in favour of cutting fuel subsidies which mainly favour relatively
affluent owners of private cars.
If politics is for now a positive catalyst for Indonesia and India, the opposite applies for
Thailand where there still at present appears to be no prospect in sight for an end to the
political standoff, with the Constitutional Court declaring last Friday that the 2 February election
was null and void. The issue has now become whether the opposition Democrat Party will agree
to contest the next election due to be held around May or June this year. A decision not to take
part would clearly be negative. In a further blow to the government, the Constitutional Court
also ruled earlier this month that the Bt2tn infrastructure bill was illegal because it required off
budget financing. This has removed a further potential support for an economy which has
clearly been negatively impacted by politics.
Figure 15
Cumulative foreign net buying of Thai stocks

Source: Bloomberg
These decisions are signs that the strategy of the anti-Thaksin opposition has increasingly
moved from demonstrations in the streets to using the courts to squeeze the Yingluck
government. Meanwhile, amidst all the continuing uncertainty and related economic fallout, it is
remarkable how resilient the Thai stock market has been so far this quarter despite Bt27bn of
net selling by foreigners year to date (see Figure 15). Thus, the MSCI Thailand Index has risen
by 4.5% in US dollar terms so far this quarter, compared with a 1.2% decline in the MSCI AC
Asia Pacific ex-Japan Index (see Figure 16). Still to hedge the real risk that the Democrats do
not take part in the next general election and that a confrontation is now looming on the
streets between red and yellow shirts, GREED & fear will reduce the overweight by one
percentage point and add further to India where the BJPs Narendra Modi, like Jokowi,
continues to run strongly in the polls and where the relative-return chart is looking increasingly
compelling (see Figure 17). On the point of a potential looming confrontation in Thailand, the
red shirts last week appointed a more hawkish leader Jatuporn Prompan, who has vowed to
assemble all red shirts in a rally supporting Yingluck on 5 April.
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Figure 16
MSCI Thailand relative to MSCI AC Asia Pacific ex-Japan

Figure 17
MSCI India relative to MSCI AC World Index

Meanwhile, the Achilles heel for the current caretaker Yingluck government remains the
sheer scale of the misconceived rice subsidy scheme with Bt130bn (US$4bn) now owed to
farmers. In another sign of the courts being used against the current government, the National
Anti-Corruption Commission (NACC) confirmed in February that Prime Minister Yingluck would
be formally charged and required to defend herself against allegations that she had ignored
evidence of worsening losses and corruption in the rice-pledging scheme. The end game of this
exercise could be an impeachment process, according to CLSAs head of Thai research Suchart
Techaposai. An impeachment requires a vote of three fifths of the Senate, a body of 150 people
of whom only 77 are elected. This would be the first such impeachment in Thai history.
Meanwhile, aside from using the courts, the goal of the anti-Thaksin group continues to be to
try and discredit the Thaksin camp with its own supporters, most particularly the rice farmers.
But whether the farmers will blame the government or the anti-government demonstrators for
their failure to get paid remains unclear. On this point, the current technical caretaker status
of the Yingluck government remains relevant. This is because under the Constitution caretaker
governments are not allowed to raise money which creates commitments and liabilities on the
future government. This is why the Yingluck government has not been able to pay all the rice
farmers.
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M
a
y

1
2
J
u
l

1
2
S
e
p

1
2
N
o
v

1
2
J
a
n

1
3
M
a
r

1
3
M
a
y

1
3
J
u
l

1
3
S
e
p

1
3
N
o
v

1
3
J
a
n

1
4
M
a
r

1
4
MSCI India / MSCI AC World 200-day mov avg


But while it is evident why the yellow-shirt camp badly needs to discredit Thaksin, it is far from
clear that the anti-Thaksin camp is confident that it can win an election given that pro-Thaksin
parties have won the past four elections. This is why there is a real risk to GREED & fear that
the Democrats decide not to contest the next election. Still may be the sanguine Thai stock
market knows something GREED & fear does not.
Finally, a few adjustments will be made to the Asia ex-Japan long-only portfolio this week. The
investment in IndusInd Bank and Zee Entertainment will be increased by two percentage points
and one percentage point respectively. These investments will be paid for by removing the
existing investment in Nestle India (see Figure 19).
Figure 18
CLSA Asia Pacific ex-Japan asset allocation

Source: CLSA, MSCI
Figure 19
Asia ex-Japan thematic equity portfolio for long-only absolute-return investors

Note: Readers should refer to the relevant CLSA research reports for detailed analysis & disclosures. Source: CLSA

MSCI AC Asia
Pacific ex-Japan
weightings
26-Mar-14
CLSA
recommended
weightings
27-Mar-14
Mismatch
from current
benchmark
Australia 26.2% 10.0% -16.2%
China 17.9% 15.0% -2.9%
Hong Kong 9.2% 7.0% -2.2%
India 6.3% 12.0% 5.7%
Indonesia 2.5% 5.0% 2.5%
Korea 14.8% 15.0% 0.2%
Malaysia 3.7% 4.0% 0.3%
New Zealand 0.4% 0.0% -0.4%
Philippines 0.9% 9.0% 8.1%
Singapore 4.8% 3.0% -1.8%
Taiwan 11.2% 13.0% 1.8%
Thailand 2.1% 3.0% 0.9%
Vietnam -- 4.0% 4.0%
Total 100.0% 100.0% --
Asean auto dealer 3% Kolao Holdings
Australia gold mining 5% Newcrest Mining
China internet hosting 3% 21Vianet
China internet media 5% Tencent
China online retailer 5% Vipshop
China online-offline travel company 3% Ctrip
Hong Kong consumer 4% Chow Tai Fook
Macau entertainment 4% Galaxy
India consumer 8% Titan Industries (4%), Godrej Consumer (4%)
India banks 9% HDFC Bank (4%), IndusInd Bank (5%)
India housing finance 7% HDFC (4%), GRUH Finance (3%)
India media 4% Zee Entertainment
Korea healthcare 3% i-Sens
Philippines banks 10% Metrobank (5%), BPI (5%)
Philippines consumer 5% Universal Robina
Philippines media 4% ABS-CBN
Singapore dividend plays 5% SATS
Taiwan tech component makers 4% MediaTek
Thailand property 4% Land and Houses
Thai telecoms 5% Intouch (Shin Corp)



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