Db investigator strategy 121017

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Db investigator strategy 121017

  1. 1. Deutsche BankMarkets ResearchAsia Strategy Date 17 October 2012 The Investigator Strategy Update Ajay Kapur, CFAPolicy Uncertainty – The Financial Strategist (+852) 2203 6196Worlds Dominator ajay.kapur@db.com Ritesh Samadhiya, CFAElevated Economic Policy Uncertainty – about to drop?We might be at an important inflection point in the financial markets. The elevation of StrategistEconomic Policy Uncertainty, since 2008, to twice the level of the previous 23 years has (+852) 2203 6251increased the equity risk premium, diminished the opportunity set for stock-picking, and ritesh.samadhiya@db.comfavored defensive stocks over cyclicals. Finance professionals and investors may havewrongly concluded that this state of affairs will be prolonged and enduring. We think this Absolute Return Driversstatus quo view is wrong, and that we could be at a turning point, and that economic Current Account Balance/GDPpolicy uncertainty has probably peaked. Let the profitable boredom begin!US Political Polarization at 130-year high Sentiment (Risk-Love)Political polarization might just recede with this coming US election. Financial Total Score (current) Real Exchange Ratederegulation – a key driver of complexity, the consequent compensation premium in the Total Score (last)financial sector, the rise in the ratio of bank fee income to total income, and incomeinequality, all likely peaked together in 2008. Any potential reduction in political Technicals Valuationpolarization will likely involve compromise, less policy uncertainty, and a lower likelihood Liquidity Growthof policies being overturned with every election. PolicyEconomic Policy Uncertainty highly correlated with poor stock-picking efficacyEconomic Policy Uncertainty is a function of media mentions of the issue, laws dropping China 8 -2off the books, and economic forecast dispersion. The correlation coefficient between Hong Kong -2 -2Economic Policy Uncertainty and stock-picking efficacy was only 0.09 between 1985 and Indonesia 1 02007. Since then it has jumped to 0.74. As a stock-picker, you want Economic Policy India 4 3Uncertainty to fall. Adjusted for portfolio volatility, the stock-picking opportunity will Korea 6 -3become much wider if uncertainty drops. Malaysia 2 3Economic Policy Uncertainty is highly correlated with equity risk premium and Philippines 5 0defensives over cyclicals Singapore -2 4From 1985 to 2007, there was NO relationship between the two, a correlation coefficient Thailand 4 6of -0.07. Since 2008, however, the correlation coefficient between policy uncertainty and Taiwan 1 0equity risk premium has shot up to 0.67! Presumably, stocks are “cheap” compared with Asia ex-Japan 4 -2bonds, since policy is uncertain, the impact on cash flows is uncertain and, as the most Japan 2 -4junior entity in the capital structure, stocks need to be cheap to compensate for thispolicy uncertainty.Economic Policy Uncertainty probably peaking out globally: huge implications Our model portfolio is available as a DBIn the US, a 130-year peak in political polarization and an important election on what todo about this polarization should help resolve things one way or another. Whatever the thematic basket (DBHKASTR).outcome of the election, another four years of peak political polarization is not what theelectorate is voting for. In Europe, there is still a long way to go on reducing policyuncertainty on the part of governments, north and southern Europe, and within provincesin countries, but the ECB’s views are quite clear, agree or disagree with them. In China,the important political transition that occurs once in a decade will soon be over.Governance and policy – the work of government – can then get renewed attention. InIndia, after a period of lethargy, the government has recently been invigorated and policyhas come unstuck. Of course, this is all speculation and could be wrong, but not having aview on the direction of Policy Uncertainty is NOT an option for financial professionals,given its salience.We are adding Top Glove Corp Bhd, Korea Zinc Co Ltd., Ace Hardware and ShreeCement Ltd to the model portfolio. The model portfolio is up 23.1% YTD vs. 13.3% forMSCI AXJ.________________________________________________________________________________________________________________Deutsche Bank AG/Hong KongAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourcedfrom local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subjectcompanies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES ANDANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
  2. 2. 17 October 2012The InvestigatorTable Of ContentsPolicy Uncertainty – The Financial World’s Dominator ..................................................... 3 Asia Model Portfolio update ............................................................................................... 8 Country selection .............................................................................................................. 15 Country-sector selection .................................................................................................. 16 Asia Model Portfolio ......................................................................................................... 20 Global – valuation ............................................................................................................. 21 Global metrics ................................................................................................................... 22 Global metrics (continued) ............................................................................................... 23 Global – market intelligence ............................................................................................. 24 Global – market intelligence (continued) .......................................................................... 25 Asia – valuation ................................................................................................................ 26 Asia – investor sentiment ................................................................................................. 27 Asia – technicals ............................................................................................................... 28 Asia – growth and earnings.............................................................................................. 29 Asia – liquidity .................................................................................................................. 30 Asia – factor performance ................................................................................................ 31 Asia – market intelligence ................................................................................................ 33 Japan – valuations ............................................................................................................ 34 Japan – investor sentiment .............................................................................................. 35 Japan – technicals ............................................................................................................ 36 Japan – growth and earnings ........................................................................................... 37 Japan – liquidity ................................................................................................................ 38 Japan – factor performance ............................................................................................. 39 Japan – market intelligence.............................................................................................. 40 Companies Mentioned ..................................................................................................... 41 Appendix A ................................................................................... 42 Page 2 Deutsche Bank AG/Hong Kong
  3. 3. 17 October 2012The InvestigatorPolicy Uncertainty – The Financial World’s DominatorThe only thing that matters – policy uncertainty and polarizationWe contend that the main driver of the level of equity markets, the relative performanceof risk assets versus “safe” assets, and the potential opportunity for stock-pricing –pretty much what defines a finance professional’s life – are increasingly determined byjust one primary factor. The rest of it – all those company meetings, the travel,spreadsheets, conferences and broker research reports – are less salient compared tothis one factor. This is a bold claim. So what is this salient, primary factor? And can weprove our contention? It is, in our view, Policy Uncertainty.A few academics have quantified this for the US and Europe, and we will try to proveour point regarding its link with changes in the equity risk premium, the relativeperformance of risky versus “safe assets” and the stock-picking opportunity set. Wewill also speculate that Policy Uncertainty in the world is about to downshift remarkablyfrom current ungainly elevated levels. If we are right, this will have hugely positiveimplications for equities, risk assets and the opportunities for stock-picking. So far,since the financial crisis broke out, Policy Uncertainty has been at twice the level of theprevious 23 years, keeping the equity risk premium high, challenging risky assets versus“safe assets”, and rendering stock-picking opportunities exceptionally tough. All thatmight be about to change.But first a quick point on political polarization in the USA, where we have the data. AsFigure 1 shows, political polarization in the USA, proxied by how often Republicans votesimilarly to one another, as do Democrats, is at a record high since 1880! It is like twosullen adults sitting at opposite ends of a see-saw, looking away from each other. Withthat degree of entrenched polarization, it is tough to get policies passed, and amalodorous air of policy inaction and uncertainty hangs heavy in the land. Note inFigure 1 how policy polarization correlates well with income inequality (or plutonomy).(Interested readers in the concept of political polarization should go tohttp://www.slate.com/articles/life/do_the_math/2001/12/growing_apart.single.html, TheMathematical Evidence for Congress’ Growing Polarization by Jordan Ellenberg1.) Ourhumble contention is that time-series that are at 130-year extremes are most likely tomean revert, however fanciful that might seem at the time of the extreme. In otherwords, political polarization might just recede with this coming US election. Financialderegulation – a key driver of complexity, the consequent compensation premium in thefinancial sector, the rise in the ratio of bank fee income to total income, and incomeinequality, all likely peaked together in 2008. Any potential reduction in politicalpolarization will likely involve compromise, less policy uncertainty, and less of alikelihood of policies being overturned with every election. As Figure 2 shows, morepolicy certainty would diminish one key headache for business.Economic Policy UncertaintyScott Baker, Nick Bloom and Steven Davis at Stanford have constructed EconomicPolicy Uncertainty indices for the US, Europe and Canada. For the US, in their words:To measure policy-related economic uncertainty, we construct an index from three types of underlyingcomponents. One component quantifies newspaper coverage of policy-related economic uncertainty. A secondcomponent reflects the number of federal tax code provisions set to expire in future years. The third componentuses disagreement among economic forecasters as a proxy for uncertainty.The first component is an index of search results from 10 large newspapers. The newspapers included in ourindex are USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times,1 Also see the original authors’ work at http://voteview.com/Polarized_America.htm#MPRBOOKDeutsche Bank AG/Hong Kong Page 3
  4. 4. 17 October 2012The Investigatorthe Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the WallStreet Journal. From these papers, we construct a normalized index of the volume of news articles discussingeconomic policy uncertainty of some type. The second component of our index draws on reports by theCongressional Budget Office (CBO) that compile lists of temporary federal tax code provisions. We createannual discounted numbers of tax code provisions scheduled to expire for each year, giving a measure of thelevel of uncertainty regarding the path that the federal tax code will take in the future. The third component ofour policy-related uncertainty index draws on the Federal Reserve Bank of Philadelphias Survey ofProfessional Forecasters. Here, we utilize the dispersion between individual forecasters predictions aboutfuture levels of the Consumer Price Index, Federal Expenditures, and State and Local Expenditures toconstruct indices of uncertainty about policy-related macroeconomic variables. (From their website,www.policyuncertainty.com)Figure 1: US: record political polarization and income inequality – about to reverse? 1.2 20 Higher 1.1 18 Polarization 1.0 16 0.9 14 0.8 12 0.7 10 0.6 8 0.5 0.4 6 House Polarization, LS 0.3 Senate Polarization, LS 4 Income share of the top 1% (excluding capital gains), RS 0.2 2 1879 1899 1919 1939 1959 1979 1999Source: Deutsche Bank. Polarization is measured as difference in party means - first dimension. http://voteview.com/Polarized_America.htmFigure 2: US: Economic Uncertainty a huge problemSource: NFIBFigure 3 shows the US, European and Canadian Economic Policy uncertainty indices.We will use the US version for our arguments here. Figure 4 shows the US EconomicPage 4 Deutsche Bank AG/Hong Kong
  5. 5. 17 October 2012The InvestigatorPolicy Uncertainty Index alongside the average US stock performance correlations withthe MSCI USA benchmark (a proxy for the potential efficacy of stock picking. If stocksall move in the same direction with the benchmark, it reduces the efficacy of stock-picking, once we adjust for portfolio volatility). A few things stand out. As the inventorsof the index note, US Economic Policy Uncertainty since 2007 has been at twice thelevel of the prior 23 years. As Figure 4 also shows, the relationship between EconomicPolicy Uncertainty and the stock-picking opportunity set has increased markedly since2008. The correlation coefficient between Economic Policy Uncertainty and stock-picking efficacy was only 0.09 between 1985 and 2007. Since then, it has jumped to0.74. If you are a stock-picker, you want Economic Policy Uncertainty to subside, bigtime. Adjusted for portfolio volatility, the stock picking opportunity will become muchwider, and life presumably a bit less stressful. Having a view on Economic PolicyUncertainty is critical.Figure 3: Economic Policy Uncertainty has been elevated since 2008, about to drop?300 300 US Economic Policy Uncertainty Index250 European Economic Policy Uncertainty Index High policy 250 uncertainty Canadian Economic Policy Uncertainty Index200 200150 150100 100 50 50 0 0 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09 1/12Source: Deutsche Bank, Scott Baker, Nick Bloom and Steven Davis (www.policyuncertainty.com)Figure 4: Economic Policy Uncertainty and stock correlations with the benchmark movetogether. Stock-picking to become more potent as Policy Uncertainty drops 0.9 Average US stock performance (60 trading days) EU credit crisis 300 correlations with MSCI USA, LS Lehman Failure 0.8 87 crash US Economic Policy Uncertainty measure, RS 250 0.7 Worldcom Scandal High High policy economic uncertainty 0.6 LTCM 200 policy US recession uncertainty Asian 0.5 Crisis 150 0.4 0.3 100 Macro-driven market, 0.2 correlation 0.74 50 0.1 Stock-pickers market, correlation 0.09 0.0 0 1/86 1/88 1/90 1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06 1/08 1/10 1/12Source: Deutsche Bank, Stock correlations with MSCI USA based on rolling 60-day daily returns on a broad universe of stocks covering the top 95% of totalmarket capitalization (i.e.1,053 to 2,684 stocks from 1985 to 2012). For more on the “Economic Policy Uncertainty Index”, go to the websitehttp://policyuncertainty.com. According to the authors, “To measure policy-related economic uncertainty, we construct an index from three types of underlyingcomponents. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal taxcode provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.”Figure 5 shows the relationship between the US Economic Policy Uncertainty index andthe equity risk premium (the higher it is, the “cheaper” stocks are versus bonds). From1985 to 2007, there was NO relationship between the two, a correlation coefficient of -0.07. Since 2008, however, the correlation coefficient between policy uncertainty andDeutsche Bank AG/Hong Kong Page 5
  6. 6. 17 October 2012The Investigatorthe equity risk premium has shot up to 0.67! Presumably, stocks are “cheap” comparedwith bonds, since policy is uncertain, the impact on cash flows is uncertain and, as themost junior entity in the capital structure, stocks need to be cheap to compensate forthis policy uncertainty. Logically, if the correlation holds and there is a substantialdecline in policy uncertainty, the equity risk premium could decline in tandem – stockswould beat bonds massively. Having a view on Economic Policy Uncertainty is critical.How about defensive sectors versus cyclicals? Does US Economic Policy Uncertaintyhave any role here? Yes. As Figure 6 shows, changes in US Economic PolicyUncertainty relate well with changes in the relative performance of defensives versuscyclicals. The correlation coefficient has doubled from 0.33 between 1985-2007 and2008 now. As policy uncertainty rises, there is an unsurprising rush to defensives, andvice versa. Again, this relationship has been a lot more salient since 2008. Having aview on Economic Policy Uncertainty is critical.Figure 5: Equity Risk Premium and Economic Policy Uncertainty have moved in lock-step since 2008. Unlocking equity risk premium if Policy Uncertainty drops250 8% High policy230 US Economic Policy Uncertainty Index, uncertainty 3mma, LS 6%210 Equity Risk Premium (S&P500 earnings 4%190 yield less 10yr bond yield), RS170 2%150 0%130110 -2% Correlation 0.67 90 Correlation -0.07 -4% 70 50 -6% 1/85 1/87 1/89 1/91 1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11 1/13Source: Deutsche BankFigure 6: Defensives versus Cyclicals ( or risk-off versus risk-on) moves with changes inEconomic Policy Uncertainty 80% Economic Policy Uncertainty, 6m change, LS 80% 60% US defensive sectors / cyclical sectors, 6 month change, RS 60% 40% 40% 20% 20% 0% 0% 1/85 1/87 1/89 1/91 1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11 1/13-20% -20%-40% Correlation 0.33 Correlation 0.68 -40%-60% Defensive sectors are Consumer staples, -60% healthcare, utilities and telecom.-80% -80%Source: Deutsche Bank. Defensive sector price index is from Datastream while MSCI CYC Index is used for cyclicals.So what is our view on Policy Uncertainty globally? We can only speculate on this, butit is important to do so. In the US, a 130-year peak in political polarization and animportant election on what to do about this polarization should help resolve things oneway or another. Whatever the outcome of the election, we think it’s safe to say thatanother four years of peak political polarization is not what the electorate is hoping for.The party that loses is unlikely to find recalcitrance and obstructionism a future vote-gathering strategy, in our view. Of course, we could be wrong and the logjam, thePage 6 Deutsche Bank AG/Hong Kong
  7. 7. 17 October 2012The Investigatorpolarization, the policy uncertainty could go on for longer. In Europe, the ECB approvedits aggressive bond-buying plan with just one dissenter. While there is still a long wayto go on reducing policy uncertainty on the part of governments, north and southernEurope, and within provinces in countries, the ECB’s views are quite clear, agree ordisagree with them. In China, the important political transition that occurs once in adecade will soon be over. A renewed focus on governance and policy – the work ofgovernment – can then begin. In India, after a period of lethargy, the government hasrecently been invigorated and policy has come unstuck.With the passage of time since the outbreak of the financial crisis, there is earlyempirical evidence in the "austerity versus fiscal spending" debate. 2 As more timeelapses and more empirical results reveal themselves, we believe policy uncertainty willlikely diminish. Policymakers and voters will be better informed about the consequencesof opposing policy choices. Thus, the menu of successful policy options will likely shrink– there should be less uncertainty about the "right" policy course.Our simple read is that the substantial elevation of policy uncertainty around the worldis probably coming to an end. The confusion of policymakers in facing the rather uniquechallenges of a once-in-seventy-years potential debt deflation was understandable. It isby no means all blue skies from here, but policymakers and politicians are both learningwhat is “working”, and what is not. Electorates are making choices about the directionthey want to go in, rather than the logjam of the past five years. Debtors and creditorsalways fight about loss allocation in a debt crisis – time is the only healer that can bringthem together, however reluctantly. That time seems to be approaching. Again, this issimple expectation on our part, and we could be plain wrong. But we stress that nothaving a view on the direction of Policy Uncertainty is NOT an option for financialprofessionals.In sum, we might be at an important inflection point in financial markets. The elevationof Economic Policy Uncertainty since 2008 has elevated the equity risk premium,diminished the opportunity set for stock-picking, and favored defensive stocks overcyclicals. The mindset of finance professionals and investors might have wronglyconcluded that this state of affairs is going to be prolonged and enduring – that bondsare better than stocks, that stock-picking is ruinously counter-productive in this “macro-driven” market, and that defensives are superior investments to cyclicals. This viewimplies a continued elevated level of global Economic Policy Uncertainty. We think thisstatus quo view is wrong, and that we could be at a turning point, and that economicpolicy uncertainty has probably peaked. Let the profitable boredom begin!2 See the latest IMF World Economic Outlook, Coping with High Debt and Sluggish Growth and Fiscal Policy in aDepressed Economy by Lawrence H. Summers and J. Bradford DeLong.(www.brookings.edu/~/.../2012_spring_BPEA_delongsummers.pdf)Deutsche Bank AG/Hong Kong Page 7
  8. 8. 17 October 2012The InvestigatorAsia Model Portfolio updateWe are removing Hyundai Motor Co, Hyundai Mobis, Simplo Technology Co Ltd andStarhub Ltd. Hyundai Motor and Hyundai Mobis have dropped to the fourth and thirdquintile respectively in our multifactor stock ranking model. Hyundai Motor looksweaker (relative to the region) on profitability, growth and earnings momentum.Hyundai Mobis is now looking expensive and has lower earnings momentum. SimploTechnology faded on price momentum, earnings momentum and consensus ratingmetrics. We are cutting Singapore on poor earnings revisions and dropping Starhubfrom the model portfolio.We are adding Top Glove Corp Bhd, Korea Zinc Co Ltd, Ace Hardware and ShreeCement Ltd. Top Glove ranks highly on valuation, earnings and price momentum. KoreaZinc looks better on profitability, earnings, price momentum and earnings quality. Acehardware, though looking expensive, scores well on profitability, growth, earnings andprice momentum. Shree Cement looks good on profitability, earnings, price momentumand consensus analyst rating. For factor description, see appendix A.Top Glove Corp Bhd (TOPG MK)Outlook remains positive; reiterating Buy. Disciplined capacity expansion plans,expectations of leveling raw material prices as a result of higher rubber production inASEAN and slower consumption growth globally, as well as resilient demand for rubbergloves for medical and hygiene purposes should drive multi-year growth for the sectorand allow Top Glove to generate two-year (FY13-15E) net profit CAGR of 14%, in ourview. We reiterate our Buy recommendation with a price target of RM6.05/share,implying a total return of 21%. (Michelle Foong, 12 October 2012)Korea Zinc Co Ltd (010130 KS)Gold/silver price forecast upgrades affect Zijin/Zhaojin/Korea Zinc. Deutsche Bank’sglobal commodity team has upgraded its gold/silver price forecasts by 2.4% for 2013and 11.1% for 2014 in light of further central bank action to expand monetaryconditions. The most relevant stocks in Asia ex-Japan are Zijin, Zhaojin and Korea Zinc(50% revenue exposure). We raise Zijin/Zhaojin/Korea Zinc’s 2013E earnings by2.4%/5.1%/1.5%, respectively. Our DCF valuation method differentiates Zijin (Buy) fromZhaojin (downgrade from Buy to Hold), with target price upgrades at 5.6% and 8.3%,respectively. We believe the bullishness on the gold price has been factored intoZhaojin’s share price, after a 36% rally in the past month. We roll over Korea Zinc’starget price to 2013-based and raise it by 24%. Overall, Zijin and Korea Zinc stand outafter the upgrades, with their target prices now implying 20% and 27% upside potential.(Chanwook Park, 4 October, 2012)Ace Hardware (ACES IJ)Consistently delivering strong growth and aggressive expansion. We believe that AceHardware Indonesia will continue to deliver strong growth as it is one of the bestproxies for the expanding middle class, enjoying a forecast earnings CAGR of 22% overthe next three years. Management has a strong operational and financial track record,delivering a sales CAGR of 32% on expansion of 21% over the past three years. Webelieve the company is on track to have 100 stores in the next three years, which is a43% increase. Maintaining Buy with new DCF-based target price of Rp8,000 (fromRp5,000). (Reggy Susanto, 28 September, 2012)Shree Cement (SRCM IN)A high FCF yield of over 9% in FY13e, EBITDA CAGR of 27% over FY12-FY14e, drivenby improving realizations and attractive valuations of 6.6x FY13e EV/EBITA, and a ~30%discount to large cap peers makes us confident of continued outperformance from thestock despite a 37% rise in the stock price over the past three months. (Harshad Katkar,16 October, 2012)Page 8 Deutsche Bank AG/Hong Kong
  9. 9. 17 October 2012The InvestigatorSummaryGlobalHigh policy uncertainty, and the attendant flight from junior tranches of the capitalstructure, along with a dismal prior decade of equity returns keeps them “cheap”.Reduced policy uncertainty and losses from bond portfolios are likely to be required ascatalysts to unlock value in equities. Despite all the despair about global growth, ourown mother of all leading indicators (MOMLI) is looking up, as are asset-price-basedopinions on global growth. Meanwhile, analysts have lost confidence and are lookingfor just 5% EPS growth globally in 2012, and 12% for 2013. Global Risk-Love(sentiment) has now entered euphoria, a slight concern. The global Tape is very strong,and the Marshallian K is rising.AsiaAsian valuations are moderately below historical averages. The problem is margins – inChina they seem to be in a secular decline, while in India they seem to be at a cyclicallow. The region cannot rely on asset turns and leverage – both at global levels – toboost relative ROEs compared with the world. It is probably going to have to be EBITmargin expansion that gets the PB up. We don’t see any substantial decline in the costof equity to boost PB multiples. Risk-love in Asia is at neutral. Technicals are improving– new highs are rising, and new lows have almost vanished. Asia’s leading economicindicators are bottoming, and policy is no longer being tightened. Analysts have takenthe knife to this year’s EPS growth forecasts from around 13% at the start of the year to5% now. We think that EPS revisions and economic surprises are about bottoming now.New issuance and secondaries have been paltry – a good positive contrarian indicator.Foreign fund flows have resumed in earnest as markets have rallied. Value strategiesand high profitability have done well this year, while high projected growth stocks havebeen punished.JapanJapanese stocks continue to look undervalued versus history. A return to credibleinflation and higher nominal GDP growth globally is required to unlock value. Recenttensions with China are unhelpful for risk assets in Japan. Sentiment is at neutral levels.Technicals are mixed. Economic surprises are nasty and mean-reverting. They areprobably going to get less bad. EPS revisions continue to slide. Fund flows are weakand the market continues to underperform the world as US 10-year bond yields remainsuppressed. Value remains the long-term winner.China (neutral)China’s valuations look “cheap” compared with history and are at fair value on our PBROE less COE model. However, on prospective ROEs of around 7% in three years’ timeand COE of around 10%, the current PB of 1.4 is substantially overvalued. Monetaryreflation could lift the current multiple, but the long-term deterioration in EBIT marginsis the key challenge to a re-rating. Sentiment is at neutral. Worryingly, turnover/marketcap is plumbing new depths. Once the political transition is done, and policy making,reflation and market-supportive steps are likely taken, sentiment and pathetic turnovermight perk up. Technicals are weak. Policy is tightening via the currency, and weakmonetary growth. Real interest rates for corporates are rising with the corporate pricedeflator contracting yoy. EPS revisions keep dropping as do EPS growth forecasts for2012 and 2013. We are watching carefully for EPS revisions to hook up. The good newsis that the credit multiplier is rising yoy, and the market is responsive to this indicator.The bad news is that the gap between M1 and M2 growth is still weak and correlateswith the PB multiple. We need to see a more credible reflation to see the market makeDeutsche Bank AG/Hong Kong Page 9
  10. 10. 17 October 2012The Investigatorstrong upward moves. Earnings revisions and momentum, together with analystopinions are being rewarded this year, while value investing has been patchy.Hong Kong (neutral)Hong Kong equities are at fair value compared with history, and about in the middle ofthe pack compared with the other Asian markets. Sentiment has rebounded from thepanic levels earlier this year. Turnover to market capitalization is still anemic, but we areencouraged by the rise in the gap between M1 and M2 growth. Technicals haveimproved since the summer. Policy seems to be tightening (even as real interest ratesare quite negative), and EPS revisions are still quite weak. The EPS growth forecast for2012 has collapsed – the sign changed from an expected +12% earlier this year to -12%growth expected now! For next year, EPS growth is expected at 10%. Inflation ismaking the real effective exchange rate less competitive, and the yield curve is flat. Agood dose of monetary reflation in China is required to turn liquidity up. Negative realinterest rates are here to stay in HK for longer than anyone recognizes. Value and lowrisk styles have been exceptional performers this year.India (overweight)Despite the recent run-up, the market is still undervalued on EV/Sales, EV/EBITDA andPB compared with history. On other metrics, like trailing PE and dividend yield, it is atlong-term averages. On our PB versus ROE less COE model it is at fair value, and needsfor ROEs to rise and/or COEs to fall – likely if the RBI cuts rates as the Rupeestrengthens. Risk-love has perked up from panic in May to neutral now. Meeting withscores of clients around the world, however, we think there is still considerableskepticism about the market. With the recent rally, technicals have improved. Thedowngrade to GDP growth by the IMF is unfathomable to us simpletons. The leadingindicator from the OECD has been rising for months, and the EPS revisions trajectoryhas also been improving for months. Our policy indicator has curled up with theweakness in the Rupee. Looking ahead, we expect the monetary base to start growingfrom its paltry 4% yoy rate, as net foreign asset growth resumes on the back of reformsand confidence. EPS growth projections for next year, at 12-14%, are reasonable. Themonetary base growth at 4.4% is anemic. The lack of net foreign asset growth is beingcompensated by a substantial increase in net RBI lending to government. This is avicious cycle that needs to be broken, and probably will be, if reform momentum ismaintained. The yield curve is no longer negative, but is still flat as a chapatti. Value andEPS momentum have been rewarded well this year. Stick with them.Indonesia (neutral)Valuations are at fair levels compared with history. We are a bit concerned about thedecline in Indonesia’s EBIT margins. Maintaining premium valuations to the regionrequires maintaining premium ROEs to the region. Having almost doubled capex/GDP inthe past few years, and as it is exposed to any slowdown in nominal GDP growth inChina, keep an eye on declining margins in Indonesia. Indonesia has gone from theposter child of solid macro policy last year to one that is perceived as having less thanoptimal policies – interest rates cut “too soon”, etc. We didn’t understand eitherposition. Indeed, it seems that other EM central banks are now following BI in cuttinginterest rates to combat slower growth. Maybe BI is a lot smarter than the gallery ofcritics assumes. We think policy easing makes sense (unlike consensus) – real economydata is coming in really weak, EPS revisions are negative (but recovering), and EPSgrowth expectations have collapsed from 17% a few months ago to just 8% now forcalendar 2012. Inflation, a lagging indicator, is stable at the 4%-ish level. The currency ismore competitive in real effective terms, free liquidity is booming and the yield curve isflat-ish. Value and EPS mo are king here. The rest are not really adding alpha this year.Page 10 Deutsche Bank AG/Hong Kong
  11. 11. 17 October 2012The InvestigatorKorea (underweight)The market is at fair value compared with its history, but cheap compared with othermarkets on a snapshot basis. This is a low ROE, low EBIT margin market, and is likely toremain a low PB market unless ROEs rise sharply. Interestingly, unlike China, Taiwanand Singapore, where margins have been in secular decline, and ROEs have beengoosed by rising asset turns and leverage (this has also been happening in Malaysia andIndonesia recently), in Korea this is not happening. EBIT margins and ROEs movetogether – albeit at low levels. We think this deserves a higher multiple than currentlyobtained. We think investors in the other markets might be suffering from “ROEillusion”, implying very strong nominal GDP growth and more leverage – both unlikely.Sentiment is just shy of neutral. Technicals are a lot stronger than overall marketperformance suggests. Close to a record percentage of stocks are making 52-weekhighs. The leading economic indicator has been rising persistently for many monthsnow, but EPS revisions are still in the doldrums. Implication: margins are undercontinued pressure. The terms of trade are improving and we expect this to feedthrough to improving margins and EPS revisions soon. The yield curve is flat, andflattening. Value has made a massive comeback in the past six months. Price and EPSmo have been disasters this year. Stock-picking in Korea based on style is very trickybecause the factors go in and out of style with a head-spinning intensity.Malaysia (neutral)Malaysian equities are undervalued versus history but quite expensive versus the othermarkets on a relative basis. As in Indonesia, we are concerned about the sharp drop inEBIT margins, even as ROEs remain stable. Risk-Love is quite high, just shy of euphoria.Technicals are neutral. The EPS revisions index has collapsed and EPS growth numbersare being taken down for 2012. Price and EPS mo, along with ROE have been rewardedthis year. But value has been tepid.Philippines (neutral)The market is expensive compared with its history and versus other markets in theregion. We like that the EBITs and ROEs move together, so there is no leverage or assetturnover-driven “ROE illusion”. Also, years of under-investment imply many years ofstrong EBIT margins (unlike say in China, or maybe even Indonesia). Sentiment hascome off from the euphoria of the summer to neutral now. The leading economicindicator is rising, and we expect EPS revisions to do the same. This is a requirement inorder to maintain its premium valuations. Value, a perennial king in Philippine alphageneration, continues to do well, as do EPS revision strategies.Singapore (neutral)The market is cheap compared with history, but fairly valued compared with otherregional markets. EBIT margins are in secular decline, and maintaining ROEs will rely oncontinued improvements in asset turnover and leverage. Sentiment is in mild euphoria.Technicals are super-strong, with close to a record percentage of stocks making 52-week highs. EPS growth projections for both 2012 and 2013 remain lackluster. Earningsrevisions also look weak. The good news is that the terms of trade are now picking upnicely, so margins are likely to get a boost. Only stability and low risk factors aregenerating alpha. Value strategies are mixed, but momentum strategies have destroyedalpha this year.Taiwan (underweight)The market is a serial underperformer versus the region. EBIT margins are in seculardecline, and the high asset turnover is running into gravity now. Risk-love is in the tank.EPS revisions are worsening, but there is hope. The terms of trade have gone verticaland project rising EPS momentum. Given poor sentiment, and an impendingimprovement in EPS growth projections, we need to keep an eye on the underweightedDeutsche Bank AG/Hong Kong Page 11
  12. 12. 17 October 2012The Investigatormarket. This tech-heavy market is respecting price momentum and stocks supported byanalysts.Thailand (overweight)The market is fairly valued versus history and the region. The exception is PB – wherethe market is at record premiums to the region. Could that be a reward for the solidROEs (driven not by EBIT margins but asset turns)? Sentiment is neutral. Technicals aresuper-strong. About a quarter are making 52-week highs. Growth-leading indicators arestill strong, even as incoming data have been weak. Analysts have dropped projected2012 EPS growth forecasts from 23% earlier his year to about 15% now. Also, we arecomforted with the rise in the terms of trade that should be supportive of margins andEPS growth going forward. Value has been a disaster this year, while price and EPSmomentum strategies have been huge winners.Page 12 Deutsche Bank AG/Hong Kong
  13. 13. 17 October 2012The InvestigatorFigure 7: Model portfolio performance since inception (13 September 2010) 22 Model portfolio absolute returns (After T/C): 19.0% 1-week relative returns 0.1% 22 20 MSCI Asia ex Japan absolute returns: 4.8% 1-month relative returns 2.5% 20 18 Model portfolio relative returns (After T/C): 14.2% YTD relative returns 9.8% 18 16 12-month relative returns 12.1% 16 14 After Transaction Cost 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 9/10 11/10 1/11 3/11 5/11 7/11 9/11 11/11 1/12 3/12 5/12 7/12 9/12Source: Deutsche Bank, MSCI, FactSetNote: Performance is measured in local currency. Stock changes are effective as of close one day after they are officially published (i.e. Changes published on 4th May 2011 will be effective as of close 5th May 2011).*New additions. Assume 50bps on both buying and selling as proxy for transaction cost. Note: Past performance does not guarantee future resultsFigure 8: Model portfolio country and sector overweights/underweights -12% -9% -6% -3% 0% 3% 6% 9% 12% Sector (MSCI Wgt) -12% -9% -6% -3% 0% 3% 6% 9% 12% Country (MSCI Wgt) Retailing (1.5%) THAILAND (3.0%) Materials (7.0%) Energy (7.2%) INDIA (9.5%) Telecom (6.7%) Cons Svc (1.7%) Div Financials (2.4%) INDONESIA (3.7%) Cap Gds (7.6%) Health Care Equip (0.3%) PHILIPPINES (1.2%) Media (0.3%) Real Estate (7.0%) CHINA (23.9%) Comm Svc (0.0%) Pharma/Biotech (0.7%) Underweight Neutral Overweight Overweight Software (3.2%) Underweight SINGAPORE (7.3%) Cons Dur/App (0.8%) Food/Staples Retail (0.8%) MALAYSIA (4.9%) Food Beverages (3.6%) Hhold Products (1.2%) Utilities (3.9%) HONG KONG (11.9%) Insurance (4.3%) Transport (1.9%) TAIWAN (14.4%) Current O/U wgt Tech Hardware (4.5%) Current O/U wgt (17 October 2012) (17 October 2012) Autos (5.0%) Previous O/U wgt Previous O/U wgt Semis (10.1%) SOUTH KOREA (20.1%) (07 August 2012) (07 August 2012) Banks (18.1%) -12% -9% -6% -3% 0% 3% 6% 9% 12% -12% -9% -6% -3% 0% 3% 6% 9% 12%Source: Deutsche Bank, MSCI.Note: Numbers in parenthesis are sector and country weights in MSCI AC Asia ex Japan index. The model portfolio is equal weighted; each stock has weighting of 2.5%.Deutsche Bank AG/Hong Kong Page 13
  14. 14. 17 October 2012The InvestigatorFigure 9: Asia Model Portfolio Profitability FY 13 Cons Rec Valuation Price Mo Earnings Earnings Stability Growth Quality DB Date Close YTD Rtn Hldg Per Mcap 20D ADT PE (DB Risk Mo BB Ticker Mkt Rec Added 16Oct12 (%) Rtn (%) Beta (U$bn) (U$ m) est)Energy - MSCI wgt: 7.2%, portfolio wgt: 12.5%CNOOC Ltd. 883 HK CN H 11Dec10 15.94 20.5 -6.7 1.40 91.8 111.5 8.9 o + ++ o o ++ o o oOil & Natural Gas Corp. Ltd. ONGC IN IN B 14Sep10 278.95 12.4 -14.7 0.65 45.2 20.3 8.7 ++ ++ + o o ++ o o oOil India Ltd. OINL IN IN B 30Sep11 485.85 5.9 -6.2 0.29 5.5 1.7 9.1 ++ + + o + ++ o o oPTT PCL PTT TB TH NR 14Sep10 311.00 1.6 1.27 29.0 38.7SK Innovation Co. Ltd. 096770 KS KR B 7Aug12 154000 8.5 -6.9 1.47 13.5 55.8 6.6 ++ ++ + o - - ++ - - o oMaterials - MSCI wgt: 7.0%, portfolio wgt: 12.5%Grasim Industries Ltd. GRASIM IN IN B 27Jun12 3464.85 39.0 36.1 0.75 6.0 6.0 11.0 + + ++ ++ ++ o o + oShree Cement Ltd. SRCM IN IN B 17Oct12 4048.80 87.7 NA 0.70 2.7 6.3 17.7 - ++ ++ ++ o - -- o ++Indocement Tunggal Prakarsa INTP IJ ID B 14Sep10 21450 27.5 19.6 1.34 8.2 5.5 15.9 - ++ ++ ++ ++ ++ o o oKorea Zinc Co. Ltd. 010130 KS KR B 17Oct12 461000 51.6 NA 1.13 7.9 31.9 8.2 o ++ ++ ++ - + o + oLG Chem Ltd. 051910 KS KR B 14Sep10 316500 -0.3 -5.3 1.53 19.3 73.6 11.9 o ++ + o o ++ o o --Capital Goods - MSCI wgt: 7.6%, portfolio wgt: 10.0%China Communications Construction Co. Ltd. 1800 HK CN B 5May11 6.94 18.0 5.5 1.41 12.1 19.3 7.0 + + o ++ o o o o ++Sino-Thai Engineering & Construction PCL STEC TB TH B 7Aug12 20.70 72.8 36.2 0.82 0.8 3.9 19.3 o + ++ ++ o ++ o o ++SembCorp Industries Ltd. SCI SP SG B 14Sep10 5.47 39.3 30.0 1.36 8.0 9.3 11.4 o ++ o ++ o + o o +SembCorp Marine Ltd. SMM SP SG B 11Dec10 4.92 35.3 8.0 1.66 8.4 14.5 13.2 o ++ o + o ++ - - o +Commercial Services & Supplies - MSCI wgt: 0.0%, portfolio wgt: 0.0%Transportation - MSCI wgt: 1.9%, portfolio wgt: 0.0%Automobiles & Components - MSCI wgt: 5.0%, portfolio wgt: 0.0%Consumer Durables & Apparel - MSCI wgt: 0.8%, portfolio wgt: 0.0%Consumer Services - MSCI wgt: 1.7%, portfolio wgt: 5.0%SJM Holdings Ltd. 880 HK HK B 9Mar12 16.30 34.5 10.1 1.34 11.7 9.7 12.7 + ++ ++ ++ o ++ ++ oMinor International PCL MINT TB TH B 27Jun12 17.80 76.2 26.2 1.06 2.1 6.5 20.4 o ++ ++ ++ o - - ++ oMedia - MSCI wgt: 0.3%, portfolio wgt: 2.5%BEC World PCL BEC TB TH H 11Nov11 57.25 31.7 59.1 0.73 3.7 3.4 20.8 - ++ ++ o o ++ o o --Retailing - MSCI wgt: 1.5%, portfolio wgt: 7.5%Belle International Holdings Ltd. 1880 HK CN B 5May11 13.62 2.0 -6.9 0.93 14.8 25.5 15.7 - ++ ++ ++ o ++ ++ oGiordano International Ltd. 709 HK HK H 14Sep10 6.40 20.4 61.0 0.88 1.3 2.5 12.3 + ++ + + o ++ ++ ++Ace Hardware Indonesia ACES IJ ID B 17Oct12 6650.00 62.8 NA 0.41 1.2 0.6 23.7 - - + ++ ++ o + ++ oFood & Staples Retailing - MSCI wgt: 0.8%, portfolio wgt: 0.0%Food Beverage & Tobacco - MSCI wgt: 3.6%, portfolio wgt: 2.5%Uni-President Enterprises Corp. 1216 TT TW B 7Aug12 52.00 28.0 4.7 0.63 8.7 14.3 19.9 - + ++ ++ - + o oHousehold & Personal Products - MSCI wgt: 1.2%, portfolio wgt: 0.0%Health Care Equipment & Services - MSCI wgt: 0.3%, portfolio wgt: 2.5%Top Glove Corp. Bhd TOPG MK MY B 17Oct12 5.31 8.8 NA 0.99 1.1 2.2 14.1 ++ o + ++ o ++ - - o oPharmaceuticals & Biotechnology - MSCI wgt: 0.7%, portfolio wgt: 0.0%Banks - MSCI wgt: 18.1%, portfolio wgt: 7.5%ICICI Bank Ltd. ICICIBC IN IN B 7Aug12 1042.05 54.6 7.0 1.44 22.7 78.4 12.7 - - o o o o -- o o ++BOC Hong Kong (Holdings) Ltd. 2388 HK HK B 5May11 24.10 37.0 9.3 1.02 32.9 32.2 11.7 ++ o o + o o o o +Industrial & Commercial Bank of China Ltd. 1398 HK CN B 5May11 4.88 11.2 -16.7 1.41 214.7 165.4 6.2 ++ ++ o -- o o o o ++Diversified Financials - MSCI wgt: 2.4%, portfolio wgt: 5.0%IDFC Ltd. IDFC IN IN B 15May12 149.90 65.9 30.7 1.58 4.3 24.5 10.2 - ++ o o ++ o oHaitong Securities Co. Ltd-H share 6837 HK CN B 27Jun12 10.70 NA -0.2 NA 14.5 7.0 15.0 + + + + o o ++Insurance - MSCI wgt: 4.3%, portfolio wgt: 2.5%Dongbu Insurance Co. Ltd. 005830 KS KR NR 9Mar12 49550 -5.0 5.7 0.53 3.2 5.5 NA + ++ o o - oReal Estate - MSCI wgt: 7.0%, portfolio wgt: 7.5%Sun Hung Kai Properties Ltd. 16 HK HK B 11Dec10 109.00 12.9 -12.7 1.08 36.8 82.2 13.1 + o ++ o o o o o --Keppel Land Ltd. KPLD SP SG B 15May12 3.47 65.3 18.0 1.69 4.4 5.3 13.3 + ++ ++ - - - ++ -- oMegaworld Corp. MEG PM PH B 7Aug12 2.40 43.1 7.1 1.28 1.5 4.4 9.1 ++ o ++ o + o o o oSoftware & Services - MSCI wgt: 3.2%, portfolio wgt: 2.5%SouFun Holdings Ltd. ADS SFUN US CN B 30Aug11 17.71 28.0 10.5 1.64 1.4 3.8 8.0 ++ ++ ++ ++ -- -- + o oTechnology Hardware & Equipment - MSCI wgt: 4.5%, portfolio wgt: 0.0%Semiconductors & Semiconductor Equipment - MSCI wgt: 10.1%, portfolio wgt: 5.0%Samsung Electronics Co. Ltd. 005930 KS KR B 7Aug12 1330000 25.8 2.8 1.14 178.8 337.8 8.6 + ++ o o + + o o ++Novatek Microelectronics Corp. 3034 TT TW B 28Jan11 104.50 43.7 18.9 1.23 2.2 18.6 12.6 o ++ o o ++ + o o ++Telecommunication Services - MSCI wgt: 6.7%, portfolio wgt: 10.0%China Mobile Ltd. 941 HK CN H 14Sep10 83.70 14.7 15.9 0.46 217.0 196.8 10.8 ++ ++ + -- + ++ o o oChina Communications Services Corp. Ltd. 552 HK CN B 30Sep11 4.39 32.6 28.9 0.63 3.9 2.7 9.2 ++ o ++ ++ ++ ++ o -- ++Far EasTone Telecommunications Co. Ltd. 4904 TT TW B 30Sep11 72.40 32.5 65.7 0.12 8.1 13.9 17.4 - + ++ ++ - - ++ o o ++Telekom Malaysia Bhd T MK MY H 15May12 6.23 35.6 23.6 0.76 7.3 16.6 26.3 o o ++ ++ ++ - -- o oUtilities - MSCI wgt: 3.9%, portfolio wgt: 2.5%Guangdong Investment Ltd. 270 HK CN B 30Sep11 6.20 35.5 32.4 0.38 5.0 4.5 12.6 o o o o o o oDb X-Trackers Csi300 Trn Index Et 3049 HK CN 15May12 5.62 -7.2 -11.1 1.00 0.3 3.7Asia Model Portfolio (eq-wgt)** 23.1 19.0 1.03 26.6 36.7 13.1MSCI Asia ex-Japan, LC 13.3 4.8Source: Deutsche Bank, FactSet, Bloomberg Finance LP. Note: Stocks are sorted by names in alphabetical order within each sector. Factor scores are given on a country and sector relative basis. Very Favorable (++),Favorable (+), Neutral (0), Unfavorable (-), Very Unfavorable (--), Not Applicable (Blank). For a detailed explanation please see appendix A. Performance is measured in local currency. Stock changes are effective as of closeone day after they are officially published (i.e. Changes published on 4th May 2011 will be effective as of close 5th May 2011). *New additions. **Assume 50bps on both buying and selling as proxy for transaction cost.Page 14 Deutsche Bank AG/Hong Kong
  15. 15. 17 October 2012The InvestigatorCountry selectionFigure 10: Equity markets and their key drivers Current Account Balance/GDP Sentiment (Risk-Love) Real Exchange Rate Total Score Technicals Valuation Liquidity Growth Policy China (Latest) 8 China (Last) -2 Hong Kong (Latest) -2 Hong Kong (Last) -2 Indonesia (Latest) 1 Indonesia (Last) 0 India (Latest) 4 India (Last) 3 Korea (Latest) 6 Korea (Last) -3 Malaysia (Latest) 2 Malaysia (Last) 3 Philippines (Latest) 5 Philippines (Last) 0 Singapore (Latest) -2 Singapore (Last) 4 Thailand (Latest) 4 Thailand (Last) 6 Taiwan (Latest) 1 Taiwan (Last) 0 Asia ex-Japan (Latest 4 Asia ex-Japan (Last) -2 Japan (Latest) 2 Japan (Last) -4Source: Deutsche Bank.Blank cell represents factor not used in the model for that country. Most Favorable, Favorable, O Neutral, Less Favorable and Least Favorable.Liquidity is based on yoy change in M2/Market Cap ratio, valuation is based on composite valuation index (based on trailing P/E, 12m fwd P/E, P/cash earnings,P/book, dividend yield, EV/EBIDTA and EV/Sales), sentiment is based on Risk-Love indicator, technicals are based on several price based indicators like percentageof stocks above 200-d moving average, number of 52-Weeks new lows and new highs, indices above/below their 200-d moving average etc., growth is based onleading economic indicators and earnings revision index, current account balance/GDP is based on deviation from 3-year moving average trend, real exchange rateis based on deviation from 2-year moving average trend and policy is based on policy indicator.Deutsche Bank AG/Hong Kong Page 15
  16. 16. 17 October 2012The InvestigatorCountry-sector selectionFigure 11: We prefer sectors with value, high earnings and price momentum, and better profitability 0.90 JP Banks HK Real Estate JP Telecom 0.80 KO Autos ID Hhold Products 0.70 TH Banks ID Banks Most preferred sectors CH Banks TH Food Bev 0.60 TH Telecom JP Energy IN Software 0.50 High earnings revisions & IN Hhold Products JP HCare Equip/Svc price momentum, better MY Utilities MY Telecom CH Real Estate 0.40 KO Insurance profitability KO Tech Hard/Equip IN Div Fin SG Banks CH Utilities 0.30 JP Autos TA Banks PH Real Estate TH Energy SG Real Estate SG Retailing JP Transport ID Utilities JP Div Fin ID Autos HK Telecom JP Food Bev KO Utilities JP Fd/Staples Retail 0.20 ID Pharma/ Biotech JP Comm Svc IN Energy HK Utilities PH Div Fin PH Cap Gds MY Energy JP Pharma/ Biotech HK Banks Software JP HK Cons Svc IN Banks ID Food Bev 0.10 TH Media IN Pharma/ Biotech JP Materials MY Banks MY Food Bev ID Telecom HK Cap Gds CH Telecom Materials ID CH Software TA Real Estate CH Transport SG Media Materials IN Autos JP Real Estate TH Materials KO TA Div Fin 0.00 TA Telecom JP Cap Gds CH Cap GdsJP Insurance TA Cons Durables SG Div Fin KO Retailing KO Cap Gds Transport JP Tech Hard/Equip HK KO Cons Svc KO Telecom KO Energy JP Hhold Products KO Food Bev JP Retailing JP Media KO Hhold Products IN Materials SG Food Bev -0.10 MY Autos CH Tech Hard/Equip CH HCare Equip/Svc HK Semis KO Transport CH Energy TA Materials -0.20 TA Semis PH Fd/Staples Retail HK Tech Hard/Equip JP Semis SG Cap Gds TA Retailing TA Cap Gds TA Insurance HK Retailing CH Autos KO Fd/Staples Retail -0.30 IN Food Bev MY Materials HK Cons Durables SG Cons Svc SG Fd/Staples Retail CH Materials KO Cons Durables Cheaper JP Cons Svc TA Tech Hard/Equip MY Cons Svc ID Energy MY Transport MY Cap Gds PH Telecom CH Retailing -0.40 CH Insurance MY Div Fin SG Telecom TA Fd/Staples Retail CH Food Bev IN Cap Gds IN Utilities IN Telecom IN Real Estate TA Transport Least preferred sectors IN Media HK Div Fin KO Pharma/ Biotech KO Div Fin Cap Gds ID -0.50 TA Autos KO Semis SG Transport CH Fd/Staples Retail KO Software -0.60 JP Utilities -0.70 -0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70Source: Deutsche Bank, FactSetPage 16 Deutsche Bank AG/Hong Kong

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