Professional Documents
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2011 Sept26 No491 Ca Theedgespore
2011 Sept26 No491 Ca Theedgespore
HIGHS&LOWS
| BY CHAN CHAO PEH |
I
nvestors who are clinging on to the pos-
sibility of some quick rebound are seeing
their hopes diminishing. Following what
is seen as the latest half-hearted measure
by the US Federal Reserve to add another
bandage on the worlds largest economy on
Sept 21, Asian markets, led by Hong Kong,
fell in unison the next day.
The Hang Seng Index crashed below the
18,000 mark to close at 17,911.9 points on
Sept 22, down 1,006 points since Sept 19.
The Hong Kong bourse at its lowest level
since July 2009 was also dragged down by
a report suggesting that Chinas manufactur-
ing looks set to contract for the third straight
month for September. The Kuala Lumpur Com-
posite Index also went below a psychologi-
cal barrier of 1,400 to close 2.2% down on
Sept 22 at 1,387.81 points. By contrast, the
Straits Times Index (STI) was down a rela-
tively mild 36.7 points since Monday to close
at 2,720.53 points on Sept 22.
In a strategy report released on Sept 21,
DBS Vickers warns investors to brace for
more volatility. Cash is king. We will stay
defensive and expect a broad trading range
of 2,590 to 2,950 points on the STI till theres
better clarity on the macro front, the bro-
kerage states.
Unfortunately, this clarity is precisely what
is missing. To date, the eurozone crisis is show-
ing no sign of abating, with Italys downgrade
the latest stumble in an increasingly tiring se-
ries of surprises, non-events and disappoint-
ments. We believe the euro area is already
in a recession, and we believe the euro cri-
sis will get a lot worse. The US may avoid a
recession with a bit of luck, but growth will
remain low, says William de Gale, a portfo-
lio manager with BlackRock.
In another dark scenario raised by DBS
Vickers, the debt crisis will worsen and the
euro monetary union might just break up.
This will possibly send the STI down to 2,030
points. While this scenario appears fairly
remote at this juncture, developments thus
far do not suggest an early end to the crisis,
casting a pall over the markets, states the
brokerage.
Meanwhile, for investors who still have an
appetite for risk, DBS Vickers recommends
they stick to two types of stocks: The defen-
sive yield plays and those that already have
prices in a recession scenario.
Under the first category are the usual favour-
ites such as the real estate investment trusts
(REITs), ComfortDelGro, ST Engineering,
SIA Engineering and StarHub, all of which
can be leaned on to continue returning div-
idend yields of more than 4%. DBS Vickers
also likes some undervalued counters. For ex-
ample, CapitaLand is now trading at an esti-
mated 0.8 times price-to-net book value, and
40% below the price target of $4.34. The de-
veloper has been actively buying back its own
shares, which should provide the necessary
support for the price. The stock closed on
Sept 22 at $2.52.
ComfortDelGro, the dominant taxi and bus
operator, is already trading at below DBS Vick-
ers recession case scenario price target of
$1.47 there is no growth in bus ridership
and only 6% growth in Northeast MRT line
ridership, which the company also runs. In
fact, in a recession, assuming oil price re-
treats, this should be a positive for the coun-
ter, writes DBS Vickers.
Also recommended for inclusion in the
shopping list are Genting Singapore and Glo-
bal Logistic Properties. For the casino oper-
ator, besides an attractive valuation, there is
the possibility of junket operations which
bring in the whales becoming a poten-
tial wild card. DBS Vickers likes Global Lo-
gistic Properties for its good execution track
record, strong fundamentals and compelling
valuations. And besides strong cash genera-
tion from its Japan operations, there is also
growth potential from China.
For REITs, DBS Vickers likes Mapletree
Commercial Trust, Mapletree Logistics Trust,
CapitaMall Trust, Cache Logistics and Fra-
sers Commercial Trust. Their expected div-
idend yield for this year ranges from 5.1%
and 8%, which beats what long-term bonds
can offer.
As always, there are a few bright spots
amid the general gloom and doom. Lian Beng
Group, which is in construction and proper-
ty development, is one of them. The compa-
ny on Sept 19 announced plans to spin off
its engineering and concrete businesses for
a listing in Taiwan. Together, these two busi-
nesses accounted for 17% of Lian Bengs prof-
its. The stock, which ended at 34.5 cents on
Sept 19, closed at 37.5 cents on Sept 22 on
heavy volume.
Broker Kim Eng, which resumed coverage
on this stock with a buy and price target of
62 cents, likes the Taiwan listing as this will
further solidify its cash position while allow-
ing these businesses to grow independently
and be self-funding, writes analyst Ooi Yi
Tung. The companys construction business,
underpinned by a bulky order book of $839
million, generates $70 million in free cash flow
on top of the $150 million Lian Beng already
has in the kitty. There is no shortage of jobs
as the group has the highest market share of
construction contracts from government land
sale sites sold since 2009 that are gradually
coming onstream, writes Kim Engs Ooi.
Also, public sector housing is set to get busy
as the government on Sept 22 announced its
biggest-ever launch of 8,200 flats.
Furthermore, of the three main contractors
on Kim Engs radar, Lian Beng, at a price-to-
earning ratio of 3.9 times, is the most under-
valued. By contrast, Lum Chang and Tiong
Seng are trading at around 6.3 times, high-
er than the sector average of five times. Per-
haps, as a sign of the times, domestic plays
with big exposure to government contracts
will play a much bigger part in the portfoli-
os of investors as they hunker down to ride
the volatility.
Brace for volatility
Investors should stick with defensive yield plays, says DBS Vickers
HIGHLIGHT
Billionaire Quek Leng Chan raises
deemed stake in GuocoLeisure
INSIDER MOVES PG34
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Sept 15 16 22 21 20 19
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2720.53
2765.95
Straits Times
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KLCI
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Dow Jones
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8560.26
8668.86
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8668.86 6
Nikkei
Sept 15 16 19 22 20 21
v
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3000
Hang Seng
17911.95
19181.5
Sept 15 21 22 20 16
Brokers Digest ................. 36
Global markets round-up ... 38
Regional companies
earnings estimates ............ 39
Singapore companies
earnings estimates ............ 40
Bonds ................................ 41
Right Timing ...................... 42
Trading Ideas .................... 44
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28 THEEDGE SINGAPORE | SEPTEMBER 26, 2011
COVER
STORY
| BY GOOLA WARDEN |
I
nvestors who got out of stocks in the past
month and sought refuge in cold, hard Sin-
gapore dollars might now be growing con-
cerned about the way our home currency
is sinking versus the US dollar.
The USD/SGD cross-rate moved from about
$1.2846 at the beginning of the year to as low
as $1.20 on Aug 1. But it has snapped back to
$1.2906 over the past 17 trading days to Sept
22. Meanwhile, the Straits Times Index has lost
15% this year, significantly underperforming the
8% decline in the Standard & Poors 500; and
US Treasury bonds have risen by as much as
8%. These moves come in the wake of growing
concern about global economic growth, and the
impact that would have on Singapore.
The recent weakening is because of risk
aversion and a flight to quality, says Irvin Seah,
an economist at DBS Bank. In times of un-
certainty, people move to US Treasury bonds.
This appeared to be further exacerbated by the
US Federal Reserves announcement on Sept 21
of plans to replace its holdings of short-term
debt with longer-term debt in order to flatten
the yield curve and stimulate growth. Under
the programme, which will stretch to June
2012, the Fed will buy US$400 billion ($507.5
billion) of bonds with maturities of six to 30
years, while selling an equivalent amount of
debt maturing in three years or less.
That should put downward pressure on
longer-term interest rates and help make broad-
er financial conditions more accommodative,
says the Federal Open Market Committee in a
statement. Yet, some analysts say the move un-
derscores the parlous state of the US economy,
as well as the growing strains in global finan-
cial markets. It also suggests that the Fed no
longer has the capacity to continue a full-scale
quantitative easing programme. The Feds bal-
ance sheet is very stretched, and the only way
to buy more Treasuries is to sell some, says
Leong Wai Ho, a senior regional economist at
Barclays Capital.
What does all this mean for the Singapore
dollar? Seah of DBS says it points to weakness
in the Singapore economy, and the growing like-
lihood of the Monetary Authority of Singapore
(MAS) shifting its policy on the Singapore dol-
lar to one of more gradual appreciation. Singa-
pore manages its monetary policy through the
Singapore dollars exchange rate versus a bas-
ket of currencies, accelerating the rate of ap-
preciation to tighten policy and decelerating it
to loosen its stance. Seah says the market has
been pre-emptively pricing a monetary easing
in Singapore.
Leong of Barclays Capital has a similar prog-
nosis. We see a clear downside risk emanat-
ing from external demand and that is going to
shift market perceptions, he says, adding that
he expects MAS to ease the rate of the Singa-
pore dollars appreciation to 1% from 3.5%
currently.
Singapore dollar
Recent volatility in foreign exchange markets has wiped out much of the
past years appreciation of the Singapore dollar versus the US dollar. What
sparked the crash? Where is our home currency headed now?
This shift in expectations has had a dramat-
ic effect on financial markets partly because
central banks in the region have spent most of
the past year fighting inflation instead of stav-
ing off slower growth. In the wake of the Feds
massive quantitative easing programme over
the past two years, prices of everything from
commodities to real estate have soared in Asia,
forcing interest rates to rise and Asian curren-
cies to appreciate versus the US dollar. The
longer Europe remains in crisis, the higher the
probability of easier monetary policy in Asia,
says DBS in a report dated Sept 21.
But will the flight of capital to US Treas-
uries turn into something more ominous for
Asia? Could asset prices pumped up by suc-
cessive rounds of quantitative easing now sink
precipitously? What impact would that have
on Asias banks?
Economists at the Canadian-based Bank
Credit Analyst have already raised the alarm-
ing spectre of capital flight from emerging mar-
kets as their currencies collapse. In a report
dated Sept 20, BCA argues that emerging-mar-
ket currencies have experienced a technical
breakdown against the greenback. The lat-
est depreciation in emerging-market currencies
should be viewed as confirmation of a bear
market in emerging-market risky assets, the
BCA report states. Trade-weighted US dollar
strength is consistent with a deflationary eco-
nomic environment globally.
On Sept 20, the International Monetary Fund,
in its Global Financial Stability Review, warned
that emerging markets including emerging Asia
could face an outflow of funds. As much as
US$21.8 billion could flow out from Asian eq-
uity markets, the IMF estimates. This is twice
the US$11.9 billion outflow during the global
financial crisis of 2008. Furthermore, if growth
falls and the European and US sovereign debt
crises worsen, outflows could rise to as high
as US$38.3 billion, the IMF suggests.
Additionally, the IMF pointed out that the
global economy has entered a dangerous
new phase of sharply lower growth. Euro-
zone growth will fall to 1.6% this year, and
will register a paltry 1.1% the next. Global
growth will shrink to 4% in 2012, down from
5% in 2009 and the US is likely to have weak
growth for years to come.
Singapore is already feeling these global
headwinds. Leong of Barclays Capital notes in
a report dated Sept 21 that about one quarter of
Singapores non-oil domestic exports (NODX)
were shipped directly to the US and euro area
in 2010. But this is an underestimate of the
true share of exports to these regions, since
they are also significant end-buyers of inter-
mediate goods exported from Singapore for as-
sembly and processing elsewhere. Apart from
trade links, external shocks can be transmitted
through other channels, he states.
In the wake of the 2008 global financial cri-
sis, the IMF estimated that, taking into account
financial linkages, a one percentage point de-
cli
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THEEDGE SINGAPORE | SEPTEMBER 26, 2011 29
COVER
STORY
Jan 10 July 10 Jan 11 July 11
SGD to stop depreciating
95
97
99
101
103
105
107
109
111
113
DBS SGD NEER and policy band
SGD sell-off
overdone
Singapore is leveraged to
global business cycle
8
6
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10
5
0
-5
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-25
1Q00 2Q00 3Q02 4Q03 1Q05 2Q06 3Q07 4Q08 1Q10 2Q11
US GDP (% y-o-y)
SG GDP (% y-o-y, RHS)
Euro Area GDP (% y-o-y)
Sept 26, 2008 Sept 22, 2011
USD/SGD cross rate
($)
B
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1.20
1.25
1.2986
1.35
1.40
1.45
1.50
1.55
cline in US GDP growth would subtract 0.9
percentage points from Singapores growth. In
July, Singapores industrial production, exclud-
ing the volatile biomedical segment, fell 5.6%.
The city-states August electronics Purchasing
Managers Index also dipped to its lowest level
since February 2009.
Impact on banks
Front and centre in the potential fallout from a
combination of lower growth, capital flight and
declining asset prices are Singapores banks:
DBS Group Holdings, Oversea-Chinese Bank-
ing Corp and United Overseas Bank. Although
their share prices have fallen between 5% and
9% since August, investors should brace them-
selves for further downside, analysts say.
Leng Seng Choon, an analyst at OSK DMG,
expects the persistent problems in the EU and
US to dampen loan expansion and raise con-
cerns on asset quality. The three banks are
currently trading at close to one standard devi-
ation below the historical price-to-book mean.
During the height of the SARS panic in March
and April 2003, the banks traded at close to
two standard deviations below the historical
mean, he says, in a report dated Sept 20.
At their nadir during the global financial cri-
sis, in March 2009, shares in the three banks
sank to an even more drastic three stand-
ard deviations below their historical price-to-
book mean, says Lengs report. While it is
still uncertain if we would witness a repeat
of the earlier crises, we see no catalysts driv-
ing banks share prices in the short term, he
says. The nine-year historic price-to-book for
DBS is 1.34 times, for OCBC 1.52 times, and
for UOB 1.59 times.
Among the first signs of trouble would be
a slowdown in loans growth. Leng is project-
ing loans growth of 8% to 8.5% in 2012 for
the three banks. Thats down sharply from this
years loans growth expectations of 16% to 20%.
There remains the risk of further downside,
particularly for corporate loans, he warns.
In the end, however, it is provisioning for bad
loans that will do the most damage to their
earnings. The average non-performing loan ra-
tios of 1.5% at the local banks as at June 30
are at their lowest in 12 quarters.
Of the three banks, Leng figures that UOB
is the safest bet now for investors who want to
take advantage of the sell-off, even though its
shares have actually performed the best recent-
ly. UOB has delivered a total return (including
dividends) of minus 1% this year, Leng calcu-
lates. By comparison, DBS has returned neg-
ative 11% and OCBC negative 13%. UOBs
conservative loan stance over the past three
years [9.7% loan compound annual growth
rate, versus DBSs 12.5% and OCBCs 15.6%]
and greater focus on housing loans will help
to keep its asset quality high, and hence pro-
visions low, Leng says.
As it happens, shares in UOB are also trad-
ing at one standard deviation below its his-
toric price-to-book ratio, while shares in DBS
and OCBC are at less than one standard devi-
ation below their respective price-to-book ra-
tios. As Leng sees it, shares in DBS could be
weighed down by narrowing interest spreads,
while shares in OCBC are still relatively ex-
pensive. We see no catalyst driving DBSs
share price, as Sibor is seen to remain soft till
around 2013. OCBCs current [price-to-book
ratio] is higher than its peers which limits
share price upside.
But should investors even be thinking about
buying risk assets at this point? Should they
gradually accumulate relatively low-risk stocks?
Or, wait for a crash and scoop up more cycli-
cally oriented stocks?
Like Mount Vesuvius
Gauging the likelihood of a full-blown crisis
in Europe and major recession in the US is
tough, because much really depends on how
politicians and policymakers in those coun-
CONTINUES ON PAGE 33
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30 THEEDGE SINGAPORE | SEPTEMBER 26, 2011
COVER
STORY
Goldman Sachs stock ideas
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Name of Country Rating Quoted Price Potential upside/ 2011 PER 2011 Dividend
company currency downside (times) yield
(%) (%)
China Construction Bank China Buy HKD 8.18 29 7.3 5.1
Singapore Telecommunications Singapore Buy SGD 3.03 13 12.8 7.4
Sun Hung Kai Properties Hong Kong Buy HKD 98 60 13.2 3.8
POSCO South Korea Buy KRW 389,500 46 9.0 2.4
Bharti Airtel India Buy INR 390.1 15 23.0 0.2
Wesfarmers Australia Buy AUD 30.2 35 16.3 5.3
ICICI Bank India Buy INR 879 26 17.0 1.8
Bank Mandiri Indonesia Buy IDR 5,750 18 14.3 2.5
PTTEP Thailand Buy THB 159 29 10.5 3.8
CIMB Group Holdings Malaysia Buy MYR 6.77 31 13.4 3.7
Jardine Cycle & Carriage Singapore Neutral SGD 39.58 -1 12.9 2.9
Genting Bhd Malaysia Buy MYR 8.9 38 12.5 1.6
SJM Holdings Hong Kong Buy HKD 14.82 40 15.4 3.3
Philippine Long Distance Philippines Neutral PHP 2,240 -1 11.5 9.0
KT Corp South Korea Buy KRW 36,350 28 5.8 7.0
China Telecom China Buy HKD 4.96 9 17.9 1.7
Evergrande Real Estate Group China Buy HKD 3.22 109 4.8 5.2
E-Mart South Korea Buy KRW 322,500 7 13.5 0.5
PT XL Axiata Indonesia Buy IDR 2,825 27 13.5 1.5
Anhui Couch Cement China Buy HKD 22.55 58 6.9 1.9
Guangdong Investment China Buy HKD 4.98 15 10.3 3.8
Largan Precision Taiwan Buy TWD 768 22 19.9 1.6
Intime Department Store (Group) Co China Buy HKD 9.2 27 20.9 1.9
Taishin Financial Holdings Taiwan Buy TWD 11.9 23 9.7 2.1
Mapletree Commercial Trust Singapore Buy SGD 0.85 16 18.6 5.9
IRB Infrastructure Developers India Buy INR 169.6 21 10.6 0.9
| BY GOOLA WARDEN |
T
imothy Moe, managing director of
Goldman Sachs Global Investment Re-
search unit, based in Hong Kong, has
more than one view of Asian markets.
That reflects the enormous uncertain-
ty in European and US markets in the weeks
ahead. And, how investors position themselves
largely depend on how they believe things will
play out, he says.
To be sure, Asian markets as represented
by the MSCI Asia ex-Japan index have already
taken a significant hit in recent weeks, falling
some 20% since July. At current levels, they
are already at the low end of their 20-year val-
uation range, says Moe. By his calculations,
the MSCI Asia ex-Japan index is now trading
at only 10.4 times forward earnings. Thats
1.6 standard deviations below the mean.
In terms of trailing price-to-book multiples,
the MSCI Asia ex-Japan index is hovering at
about 1.7 times, which is higher than the lows
of 1.3 times witnessed in some previous crises,
but still almost one standard deviation below
the average. From a valuation standpoint,
were pricing in a certain amount of concern
in Asian markets, Moe concludes.
Yet, the global situation is so fluid at the
moment that it is impossible to judge with any
certainty if the economic growth and corpo-
rate earnings assumptions that underlie the
markets current valuation metrics are reason-
able, Moe adds. The tricky part here is you
cannot say that all the risk of a much harsher
case has been priced in.
So, whats an analyst to do?
Moe has come up with three alternative sce-
narios, and the corresponding corporate earn-
ings forecasts for each case. Goldmans baseline
forecasts are for restrained, sub-trend economic
growth in the US of 1.6% this year, and 2.2%
next year. For the European Union, it is fore-
casting 1.8% for this year, and 1.2% next year,
based on its baseline assumptions.
One notch down from this baseline is the sec-
ond scenario where the recession is harsher, and
there is a heightened form of credit stress. The
risk to our numbers is to the downside. We think
there is quite a high chance for what we would
call stall speed in aeronautical terms. That ba-
sically means that developed economies slow
enough to tip them into recession. Our econo-
mist thinks there is a one-in-three chance of re-
cession in both the US and EU, Moe adds.
Finally, Goldmans worst-case scenario
would be if Greece defaults and is forced out
of the euro. In that situation, European banks
would suffer a massive hit to the value of the
assets they are holding. A simple calculation
places this at one to two times their aggregate
Tier-1 capital, if you have something that is
not properly orchestrated, Moe figures. But he
hastens to emphasise that the likelihood of this
happening is remote. We think the probabil-
ity of an uncontrolled unwinding of the euro
is very low, mainly because the consequences
of that would be so adverse that policymakers
will do their utmost to avoid that.
How does all that translate into corporate
earnings forecasts for the MSCI Asia ex-Japan
index? What does it mean for investors?
On Goldmans baseline assumption of pro-
longed slow growth in the US and Europe, it ex-
pects earnings growth in the MSCI Asia ex-Japan
region to top 11%. Under the second recession-
ary-type scenario, forward corporate earnings
growth in the region is likely to be a much more
anaemic 3%. And, in the event that Greece leaves
the euro, Goldman figures that Asian corporate
earnings would contract by 17%.
Over the next few months, investors in Asia
will likely be whipsawed by the flow of news
from the US and Europe, as markets discount
the various possible scenarios. The credit side
of things in the EU is very complicated. Its an
ongoing drama with many twists and turns,
Moe says. Even under our baseline, we think
its going to be a long drawn out affair without
any resolution and there is a risk of some form
of less palatable nasty credit shock.
Bulls versus bears
Yet, under Goldmans base case scenario, the
MSCI Asia ex-Japan index could recover by as
Goldmans Moe handicaps Asian
stocks as euro crisis deepens
Moe: The tricky part here is you cannot say that all the risk of a much harsher case has been priced in
B
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Sept 26, 2008 Sept 21, 2011
MSCI Asia ex-Japan
Volume (000) Price ($)
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much as 30% in a year, in US dollar terms. That
reflects Goldmans forecast of 11% corporate
earnings growth, a 3.5% dividend yield, some
expansion in stock valuations and some appre-
ciation in Asian currencies against the US dollar.
So, if you add it all up earnings growth, ex-
pansion in multiples, some dividend yield and
modest currency appreciation the US dollar
return could easily be 25% to 30%, says Moe.
That sounds very optimistic. But the numbers
are very easy to arrive at. And, that gets us back
to where we were nine months ago. Were 20%
down from the July highs.
The problem for investors who are inclined
to be bullish is that the harsher scenarios have
probably not been fully priced into the regions
markets. Hence, there is a risk of markets go-
ing lower in the short term. In a more adverse
global environment, companies in Asia would
see their earnings crushed by negative operating
leverage while banks could start to see higher
non-performing loans, Moe cautions. Under the
harsher case, we think there could be 20% more
downside to Asian markets before the earnings
compression would be fully reflected.
Against such a backdrop, Moe says Asian eq-
uity markets are likely to be skittish and vola-
tile, perhaps retesting the lows set during the
past month. Weve got to remember there is a
lot of concern in the global picture, which Asia
could be affected by and thats something we
have to include in our advice to investors.
Lower risk and hedge
What should investors do? We think the parts
THEEDGE SINGAPORE | SEPTEMBER 26, 2011 31
COVER
STORY
ide
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| BY ANDREW BARY |
W
ith Europe seemingly at a finan-
cial precipice and its bourses
down 20% this year, the shares
over there are very cheap. As
measured by the Euro Stoxx 50,
they trade at eight times earnings and near
book value, with dividend yields above 5%,
according to Bloomberg data. The Standard
& Poors 500, off just 3.3%, is valued at 12
times this years earnings; it fetches more than
two times book and yields 2.2%.
Investors may have begun to notice this
relative bargain; European markets rose 4%
earlier this month, as global central banks
moved to provide US dollars to some of Eu-
ropes embattled banks. But
if this is an incipient trend,
theres probably time to jump
aboard. Investor caution hing-
es on three main issues: con-
tagion risk, if Greece defaults
or restructures; future liquidity
risk for Europes banks; and
deep recession. Most coun-
tries are pursuing restrictive
fiscal policies, and econom-
ic growth has slowed, even
in powerhouse Germany. Bar-
clays European equity strat-
egist Edmund Shing writes
that Europes stocks are al-
ready discounting a mild
recession.
These arent trivial risks,
but they are, to some extent,
already priced in. European eq-
uity valuations are way below
historical levels, with Germa-
nys DAX at its lowest price-to-
earnings ratio (PER) in more
than two decades. August was
the worst month for European
stocks since 1987. Yet, most big
European companies have size-
able amounts of cash, and of-
fer significant exposure to the
developing world.
A dozen blue-chip Euro-
pean stocks now look appeal-
ing, including Daimler, the
producer of Mercedes cars
and Freightliner trucks, Royal
Dutch Shell, Nestl, Unilev-
er, Vodafone and Siemens.
This is a conservative list,
with just one financial issue: global bank-
ing giant HSBC.
Earlier this month, Crdit Suisse equity
strategist Andrew Garthwaite urged a sub-
stantial overweighting in the UK market, cit-
ing a likely expansive monetary policy mod-
elled on US quantitative easing. Neither the
UK nor Switzerland is in the eurozone, and
thus have more monetary and fiscal flexibil-
ity. Their markets have some of the highest
PERs in Europe.
Negative sentiment towards Europe may
be a good contrary indicator. European re-
tail investors are abandoning the market,
writes Barclays Shing. One US adviser tells
Barrons he is tempted by European stocks
but afraid his clients would be unhappy,
given all the bad headlines.
One private investor says he has been buy-
ing European stocks such as Nestl, Unilev-
er, Vodafone and Royal Dutch Shell. He says,
The only true triple-A credits in the world are
high-quality global companies. The spread
between European dividend yields and corpo-
rate-bond yields is at near-record levels.
Note: The 10 European stocks we liked
amid last years weak market spell have hand-
ily bested the Euro Stoxx 50, rising 20% based
on prices of their US-listed shares earlier this
month, against a 20% drop for the index. A
13% rise in the euro helped the US shares.
An appealing feature of these names is their
net dividend yields after European withhold-
ing taxes. Even before the recent selloff, Eu-
rope was a dividend mecca, since most Eu-
ropean managements and investors prefer
dividends to stock buybacks.
Royal Dutch Shell, whose US shares trade
near US$67, probably has the strongest div-
idend outlook among major European oils.
Morgan Stanley analysts started coverage of
the stock early this month with an over-
weight rating, writing that with sever-
al large projects coming onstream in the
coming years, free cash flow will rise, al-
lowing the company to boost its dividend.
Total, the French oil company, has a high
dividend yield of 6.9%, but less room to
boost its payout in the coming years, ow-
ing to high capital expenditures, according
to Morgan Stanley.
A flush Daimler, whose US-listed shares
fetch around US$50, now trades for just six
times projected 2011 profits. Its dividend yield
is 4%, and it has almost US$20 a share in net
cash, although it has some unfunded pension
liabilities. Daimler is benefiting from its cars
popularity in the developing world. And Re-
nault is now an attractive sum-of-the-parts
story. Its stock, at 27 (the US shares are very
illiquid), trades at about half the value of its
stakes in public companies, notably a 43%
interest in Japans Nissan. This ignores its fi-
nance business and automotive operations.
Renault has often traded below the value of
its Nissan stake, but the gap is particularly
wide now.
Shares of consumer-products giant Uni-
lever do not fully reflect the companys re-
structuring efforts; they trade at US$31, or
about 13 times projected 2011 profits. With
more than half its sales coming from emerg-
ing markets, Unilever is one of the best de-
veloping-market stories among major con-
sumer companies. It also has
valuable controlling stakes in
publicly traded Indian and In-
donesian units. And Nestl
is off its spring peak, trading
around US$56, or 15 times es-
timated 2011 profits. Thanks
to a broad portfolio and ge-
ographic reach, Nestl could
be the best long-term story in
the food industry.
Frances Sanofi has one of
the lowest PERs of any drug
maker, around seven times;
its stock trades near US$33.
Sanofi should get past most of
its patent expirations next year
without too much pain. It re-
cently offered a bullish multi-
year forecast starting in 2012.
It has a lucrative diabetes fran-
chise and significant develop-
ing-world exposure.
Novartis has a better-than-
average outlook among phar-
maceutical majors, thanks in
part to its control of eye-care
giant Alcon, and its shares, at
around US$56, trade about 10
times estimated 2011 profits.
Vodafone and Verizon Com-
munications share ownership
of Verizon Wireless each
companys best asset. Verizon
owns 55% and Vodafone, 45%.
At US$26, Vodafone trades
about 10 times estimated prof-
its, a discount to Verizon at 16
times, and Vodafones 5.4%
dividend is more secure than
Verizons because the Vodafone dividend is
a smaller share of its earnings.
European telecoms tend to have high yields,
and Spains Telefnica has one of the high-
est above 8%. Its depressed stock, now
around US$19, reflects concerns about Spain,
Telefnicas hard-hit home market. Yet, Tel-
efnica gets just a third of its revenue from
Spain; the rest comes from the developing
world and elsewhere in Europe.
There are plenty of exchange-traded funds
focused on Europe, too. The Vanguard MSCI
European ETF, a broad-based fund, has a yield
of 5%. There are country ETFs for major mar-
kets, including the iShares MSCI United King-
dom and similar iShares ETFs for Germany,
France and Italy.
In sum, Europe has lots of problems but
it also has plenty of appealing stocks.
2011 Dow Jones & Co, Inc
Time to buy Europe carefully
The risks are by no means inconsequential, but several major
European stocks might now offer good value. Here are a dozen
that operate solid businesses and offer good dividend yields.
Bargain-priced dozen
Judged on fundamentals, these European blue-chips look cheap
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*Past 12 months ***PER for FY ending March 2012
**PER for FY ending September 2011 All data through Sept 22 E = Estimate
COMPANY RECENT YTD 2011E DIVIDEND
PRICE (US$) CHANGE (%) PER (TIMES) YIELD* (%)
Telefnica 19.61 -14.0 8.4 8.1
Total 45.57 -14.8 6.2 6.9
Vodafone** 26.11 -1.3 9.6 5.4
HSBC 41.40 -18.9 9.1 4.6
Royal Dutch Shell 66.86 0.1 8.0 4.3
Daimler 49.58 -26.6 6.7 4.0
Sanofi 33.59 4.2 7.0 3.9
Novartis 56.45 -4.2 10.1 3.6
Unilever 31.29 -0.4 13.4 3.3
Nstle 56.64 -3.7 14.9 3.1
Siemens *** 97.64 -21.4 8.9 2.8
Renault 27.07 -37.8 3.9 1.1
How they stack up
Comparing six of the worlds major stock markets
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E = Estimate All data through Sept 16
MARKET VALUE YTD (%) 2011E PRICE-TO- DIVIDEND
CHANGE PER BOOK YIELD (%)
(TIMES) RATIO (TIMES)
Euro Stoxx 50 2,157.22 -22.8 7.9 1.0 5.5
FTSE 100 (UK) 5,368.41 -9.0 9.5 1.6 3.8
CAC 40 (France) 3,031.08 -20.3 8.2 1.0 5.2
DAX (Germany) 5,572.23 -19.4 8.6 1.2 4.3
Swiss Market 5,452.88 -15.3 11.7 2.1 2.7
Standard & Poors
500 Index 1,216.01 -3.3 12.2 2.0 2.2
of Asia to be focusing on would be the areas
which are more domestically driven and there-
fore not affected by the fundamentals in the
G2 [US and Europe], where the growth con-
cerns are emanating from, says Moe. That
means domestic cyclicals, consumer staples
and telcos.
Moe also recommends hedging long equi-
ty positions in Asia. We have a couple of de-
rivative ideas, the simplest one being to have
puts on the Indian Nifty Index, he suggests.
Thats the cheapest index to hedge globally
right now. So, if you look at the volatility and
the pricing of puts on various indices, the Nifty
is abnormally cheap right now. Thats a good
way of getting some tail risk hedge without
paying too much for it.
Another way to improve the certainty of re-
turns from Asian equities is to focus on stocks
that deliver a high proportion of their returns
through dividends. Goldman has identified 25
companies in the region with dividend yields
of more than 7%, and whose dividend pay-
outs are relatively secure. Among them are Sin-
gapore Telecommunications and Mapletree
Commercial Trust in Singapore, and CIMB and
Genting Bhd in Malaysia. These are compa-
nies that are fundamentally strong and will be
able to pay their dividends, Moe says.
As for investors who are more optimis-
tic about a resolution in Europe, Moe rec-
ommends positioning for a sharper recovery.
The parts of Asia that would rally the sharp-
est and quickest are those that have been
sold down the most in the last month or two.
These would be global cyclical stocks, such
as companies in the technology sector, trans-
portation, or commodity related names, says
Moe. Among them would be stocks such as
LG Display, Daewoo Shipbuilding and En-
gineering, Samsung Heavy Industries and
Hyundai Heavy Industries.
Malaysia, Indonesia good bets
Within the Asia ex-Japan region, the Asean 4
markets Malaysia, Indonesia, Thailand and
the Philippines also look well positioned.
These markets are largely domestically ori-
entated and Moe particularly likes Malaysia
and Indonesia.
There isnt a widespread understanding
of the objective and progress being made in
the Economic Transformation Programme of
Malaysia, he says, referring to broad-ranging
reforms that the government of Prime Minis-
ter Datuk Sri Najib Tun Razak has been rolling
out. In fact, Malaysia has been quietly outper-
forming the rest of the region this year. While
the larger markets are down almost 20%, Ma-
laysia is down only 4% to 5% for the year,
Moe points out.
Unlike Malaysia, however, Indonesia and
Thailand are widely owned by mutual funds,
says Moe. If you get a global risk off event,
there is the potential for foreign capital to exit
those markets. In emerging markets, when you
get a risk off event, you could get some gappy
downward price movements, he warns. Accord-
ing to Moe, Thailand has the highest overweight
in mutual fund investments in Asean.
As for Singapore, it is more liquid and clear-
ly more vulnerable to global crises because of
its free and open economy, says Moe. Look-
ing at equity markets and valuations, the in-
dex here is pretty well dominated by banks
and properties. All that suggests that there is
a greater degree of sensitivity to the global as-
set price cycle, and we are somewhat less op-
timistic about Singapore, he says.
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32 THEEDGE SINGAPORE | SEPTEMBER 26, 2011
COVER
STORY
Tech stocks offer superior growth in
tough market, says BlackRocks de Gale
| BY CHAN CHAO PEH |
T
echnology stocks are often thought to
offer high returns for similarly high
risk. Yet, the technology sector is one
of the few places where investors will
find growth, even during the worst of
times. Rather than run for cover now, inves-
tors might be better off using the current vol-
atility to hunt for bargains in the sector, says
one fund manager.
When people are desperate for growth,
when things are going really badly, one place
where you can always find growth if you look
hard enough is the tech sector, says William
de Gale, a director and portfolio manager for
technology stocks at global fund management
house BlackRock. There are always cyclical
drivers well above the market, where growth is
strong enough to continue even in a recession
it will slow, but you will still grow. And, in
a recession, growth is scarce and there will be
a premium for it.
But, dont gravitate towards established,
heavyweight tech stocks for their supposed
safety, he adds. If you buy mega cap as a
group, you are basically dooming yourself to
underperformance. By its nature, the tech-
nology sector promotes invention, innovation
and obsolescence. Thus, big technology com-
panies have typically already had their day in
the sun, and could be about to be eclipsed by
a new trend.
If you are a mega technology stock, that
means the last 10 years were absolutely per-
fect. Through luck and scale, everything went
right, says de Gale, who runs BlackRocks
World Technology Fund, which has a total
fund size of US$151.3 million ($195.5 mil-
lion). In other sectors, this might continue
for another 10, 20 years. But, in technology,
they are usually not positioned perfectly 20
years in a row.
In fact, de Gale avoids technology sector
bellwethers such as Microsoft and Google that
other funds hold as cornerstones of their port-
folios. The way he sees it, the years of high
growth and fat margins that made Microsoft
the worlds largest software company are now
behind it. The company exploited a once in a
generation opportunity brilliantly, but the PC
business has hit a plateau. In fact, Microsoft
has been trading sideways since 2005.
If anything, it could now be under threat
by an emerging host of alternatives to the PC.
Any tablet that comes out is lost business for
Microsoft. It will take a lot to reverse that, says
de Gale, who has been looking at the technol-
ogy industry since 1997.
On the other hand, de Gale is not avoid-
ing Google because he thinks it is in imme-
diate danger of being overtaken. Instead, he
dislikes its inefficiency in capital deployment.
The metric that de Gale uses to judge this is
NOA/S, or net operating assets as a proportion
of sales. He says Googles NOA/S is 54%. By
contrast, Baidu, often referred to as Chinas
version of Google, has an NOA/S of
1%. Online retailing giant Amazon
has an even more impressive NOA/
S of zero, which basically means the
company is tapping the resources
of its customers and partners rather
than its own.
Why is the NOA/S metric for Goog-
le so different from that of Baidu and
Amazon? Its because Google has
a bloated cost base, a result of all
the free applications it offers, rang-
De Gale: If you buy mega cap as a group, you are basically dooming yourself to underperformance
E
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ing from email to online file-sharing services,
says de Gale. Google is essentially a typical
engineer-run company. Engineers are great
people, if you want something designed. But
you need some tight control, or else they will
do things at the umpteenth degree, then they
will do it again.
That is not to say Google does not have
a great business that generates prodigious
amounts of cash. Yet, theyve chosen to use
that wealth to change the world for the bet-
ter theyve explicitly said so. Thats fine if
they still own the company. But theyve sold
most of the company to us shareholders,
de Gale grumbles. As a citizen of the world,
Google makes my life better. But as an inves-
tor, I regard Google as a charity and not as an
investible company most of the time.
So, where does de Gale see opportunity
now? What tech stocks is he buying?
Latin American gem
One company he fancies is MercadoLibre, the
dominant e-commerce player in Latin Amer-
ica. Im normally not a huge fan of Internet
stocks because there are few barriers to en-
try, de Gale says. But MercadoLibre (Span-
ish for free market) is sheltered by a signif-
icant barrier to other e-commerce giants, he
adds. Its the blue stuff outside thats called
the sea, he says.
Major Internet companies are usually
spawned in the US, before crossing the At-
lantic Ocean in the east to Europe and cross-
ing the Pacific Ocean in the west to Asia. Few
have any presence or interest in Latin Ameri-
ca. For instance, eBay has no direct presence
in Latin America, except for its 10% stake in
MercadoLibre. And, while it is possible to get
a delivery from Amazon from just about an-
ywhere in the world, the online retailer actu-
ally has a direct presence in only a handful
of countries. The global players arent in the
market at all, they are looking elsewhere, ob-
serves de Gale.
In effect, MercadoLibres real competition
would be the online presence of traditional de-
partment stores and retailers. These are not par-
ticularly sophisticated. Indeed, in many cases,
they have given up and they are in fact using
the MercadoLibre platform to drive their own
websites and they use MercadoLibre to refer
links as much as Google does, de Gale says.
So, this Argentinian-based company pretty
much has the Spanish-speaking New World to
itself. And, it is now benefiting from the growth
of both middle-class spending as well as broad-
band penetration rates in that part of the world.
Moreover, postal ser vices work de-
cently in this region even as the tra-
ditional retailer is relatively underde-
veloped. This sounds wonderful if
you are running an e-commerce busi-
ness, says de Gale, who expects the
company to top 30% growth a year
for many years to come.
Shares in MercadoLibre, which are
traded on Nasdaq, closed on Sept 21,
2.5% down from a year earlier, having
come off a recent peak of US$92.73
achieved in April 28 this year. They are now
trading at 41 times forward earnings.
Hot healthcare play
Another US-listed stock de Gale likes is Cern-
er, a provider of software in the healthcare
industry. The Missouri-based company has
installed its applications in more than 9,000
facilities worldwide. Now, de Gale is betting
that Cerner is a direct beneficiary of the health-
care industrys efforts to put patients medical
records on databases.
My healthcare records in the UK were, until
very recently, written using a biro, on a piece
of card, then put away in a filing cabinet,
says de Gale. Can you even buy a filing cabi-
net now? Already, governments are spending
money to change this. For example, under last
years Health Information Technology for Eco-
nomic and Clinical Health Act (HITECH Act),
the US government designated US$19.2 billion
to help accelerate the adoption of electronic
health records, among other uses.
Could healthcare budgets in the US and Eu-
rope be slashed as their governments struggle
to get a handle on their sovereign debt prob-
lems? De Gale thinks it is unlikely. While health-
care costs will keep escalating, there is little
possibility that people will allow standards to
drop, he says. The population is very sensi-
tive to healthcare and they wont allow their
governments to provide less. And, wider use
of software such as that provided by Cerner is
but one of the many ways the healthcare in-
dustry could improve what it can offer while
trying to hold down costs.
Two European ideas
Like most other fund managers, de Gale is cau-
tious on European markets at the moment. But
he has two European-listed technology stocks
in his fund. One is French satellite operator
Eutelsat Communications, while the other
is ASML Holdings, a Netherlands-based, Nas-
daq-traded maker of equipment that semicon-
ductor producers heavily rely on.
Simply put, ASML makes sophisticated
machinery that shines light through a sten-
cil at a microscopic level, which essentially
casts and burns the circuit on a semiconduc-
tor chip. Japans Nikon, a leading photogra-
phy equipment maker, is also in this space,
but the Dutch company has the lead. If you
are a semiconductor company, every now and
then you have to buy a new piece of equip-
ment from ASML and they cost US$50 million
each, says de Gale.
Moreover, even though ASML is a Dutch
company, it draws only 4.5% of its total rev-
enue from Europe. That is even less than the
4.8% it gets from tiny Singapore. South Ko-
rea and Taiwan, the two leading semiconduc-
tor countries, account for 31% and 30.6% res-
pec tively of ASMLs sales. Furthermore, while
some of the ASML equipment is priced in eu-
ros, in reality, it is selling into an industry that
is denominated in US dollars.
ASMLs shares are currently depressed, much
like shares in most other semiconductor-relat-
ed stocks. The industry is notoriously cyclical,
however, and ASML has a near-monopoly on
a leading-edge process, de Gale points out. It
will recover and ASML will get that business
when it comes back, he says.
In short, ASML might be just what European
investors need now a European stock that
has little exposure to the euro or the regions
economy. It is therefore a very unusual safe
haven in Europe, says de Gale.
trie
for
tha
pa
Ve
the
cit
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nic
W
av
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ing
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low
ou
row
C
FRO
Some of William de Gales likes and dislikes
COMPANY PRICE AS AT YTD CHANGE EST PER MARKET CAP
SEPT 21 (US$) (%) (TIMES) (US$ BIL)
MercadoLibre 64.10 -2.50 41.27 2.8
ASML 35.76 -6.73 8.19 15.9
Cerner 69.25 46.19 37.82 11.7
Microsoft 25.61 -6.88 9.10 217.8
Google 539.20 -9.22 15.19 173.9
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THEEDGE SINGAPORE | SEPTEMBER 26, 2011 33
COVER
STORY
CAPITAL
| BY GENE EPSTEIN |
P
rophets of doom and gloom are often
criticised for being stopped clocks:
bound to be right, but just twice a
day. Financial-newsletter writer and
best-selling author Harry S Dent Jr,
by contrast, can lay claim to being a proph-
et of boom or gloom, depending on the cir-
cumstances.
Dent is as comfortable calling for Dow
35,000, as he did 13 years ago, as he is
forecasting Dow 3,800 now. His 1998 book,
The Roaring 2000s: Building the Wealth and
Lifestyle You Desire in the Greatest Boom in
History, was a New York Times best-sell-
er. Its bleaker companion, The Great Crash
Ahead: Strategies for a World Turned Up-
side Down, co-written with Rodney John-
son, was published in mid-September. Based
on these and similar titles, Dent swings
for the fences. But not always with grand-
slam results.
Two years ago this month, Dent launched
an exchange-traded fund, Dent Tactical ETF,
whose stated objective is long-term growth
of capital, with Johnson as manager and
himself as adviser and strategist.
The past 24 months havent been espe-
cially rewarding. As at Sept 9, Dents ETF
was flat since inception. Over the same pe-
riod, straightforward ETFs on major index-
es the Standard & Poors 500 Index, Dow
Jones Industrial Average and Russell 2000
realised returns of 15% or more.
No wonder the Dent vehicle only has
US$15 million ($19.4 million) in assets. But
24 months does not a long term make. And
while his wildly overblown prediction for the
2000s came to grief, Dent claims that inves-
tors who read his newsletter were told to take
profits by 2008, before the market collapsed.
As for the crash to 3,800 that he now proph-
esies, you might be able to make a plausible
case for that grim outcome, but that isnt the
case Dent makes.
Harry S Dent Jr (Dent Sr made his name
as a Republican strategist) is basically a con-
sumptionist. As such, he subscribes to the
hoary fallacy that boom-and-bust cycles are
mainly driven by consumer spending. To
make matters slightly worse, Dent is overly
impressed by demographics, believing that
consumer-spending growth is almost exclu-
sively determined by the number of folks in
their peak spending years, which he speci-
fies with excessive precision as their mid-
40s. Since the proportion of people in their
mid-40s is due to decline, we can expect a
great crash ahead.
When I expressed doubts to Dent about
this approach in a recent face-to-face inter-
view, he responded somewhat predictably
by pointing out that consumer spending is
70% of GDP. True enough, but the ups and
downs of the economy are mainly determined
by the remaining 30%.
Right now, for example, economic growth
is hitting stall speed, and real GDP is still
below its 4Q2007 peak. The stock market,
still well below its 2007 highs, reflects this
poor showing.
But to blame the malaise on consumer
spending is quite a stretch. In fact, real con-
sumer spending has already recovered, hav-
ing exceeded its 4Q2007 heights by 4Q2010.
The sick man of the economy and the
original cause of the bust is that broad
category called gross private domestic in-
vestment, meaning investment in plants,
equipment, software, housing and invento-
ries. Despite some gains, real gross private
domestic investment is still more than 16%
below its 4Q2007 peak.
True, growth of personal-consumption
expenditures could be faster, but at a 9.1%
rate of joblessness, it surely has been hold-
ing its own. Moreover, rates of joblessness
crucially depend on the performance of that
other 30% of GDP, where more than half the
economys jobs are normally found.
Consumer spending is by far the most
stable part of private-sector GDP. But to the
extent that we do find differences over long
stretches in consumer-spending growth, we
find no noticeable correlation with the per-
formance of the stock market.
Compare the roaring 1990s (1989 to 1999),
when the S&P 500 quadrupled in value,
with the sick 1970s (1969 to 1979), when
the S&P barely eked out gains. If we sub-
scribe to Dents theory, we would expect to
find that consumer-spending growth in the
1990s far outpaced the rate of the 1970s. In
fact, growth was a bit slower (3.3% a year)
from 1989 to 1999, than it was from 1969 to
1979 (3.5%).
The ageing of the baby boomers may
well bring a slowdown in consumer-spend-
ing growth and a proportionate increase in
the growth of consumer savings. We cant
be sure, since other factors also play a role,
including the rate of unemployment. But to
regard a rise in overall savings as any kind of
disaster is surely nave. For one thing, more
saving also means more investing, which
could, in turn, support stock prices.
Im going to be honest, Dent told me
at one point, in a mild state of exasperation.
I cant explain this to economists. Quite
right.