20131121 goldman sachs-asia pacific portfolio strategy 2014 outlook

November 21, 2013

Asia Pacific

2014 Outlook: Back on track

Portfolio Strategy Research

DM recovery and China reform drive our North Asia preference

Better absolute and relative returns

We expect 13% total US$ return in 2014 (MXAPJ 525 target), which would

be an improvement on the region’s 2% return in 2013 and 20% under-

performance vs. DM. We see improving global growth, the related tapering

of quantitative easing in the US, policy adjustment in Asia (China reform,

south Asia macro tightening), and politics as key macro themes.

Earnings: key performance driver

We expect earnings to accelerate back to trend in 2015 after 4 years of sub-

trend growth. Our top-down EPS growth forecasts are 10% and 14% for

2014 and 2015. Capex discipline and moderating input costs should help

non-financial margins improve 50bp to 7% in 2015 after a 20bp gain in ’14.

Little room for valuation expansion, except in China

Equal-weighted P/E valuations are 15.9x forward earnings, 0.8sd above the

10-yr mean and 31% higher than cap-weighted multiples. Macro models

and real earnings yield gaps point to flat valuations. EPS growth will

therefore be the main return driver. China is the exception: we expect

multiples to recover from a low base as confidence in reform builds.

Upgrade China, Taiwan; three flavors of earnings

We upgrade China on improving reform momentum, and also raise

Taiwan and stay Overweight Korea for their exposure to improving DM

growth. By macro slice, we advocate global cyclicals vs. asset-sensitive

financials. Stock ideas: three flavors of earnings: delta (rising margins),

value (attractively priced growth), and destination (Europe-exposed).

Secular themes: consumption digitalization, urbanization and green GDP.

China’s valuations may respond favorably to reforms; Korea and Taiwan

are most sensitive to stronger global growth

Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research.

Timothy Moe, CFA +852-2978-1328 [email protected] Goldman Sachs (Asia) L.L.C.

Kinger Lau, CFA +852-2978-1224 [email protected] Goldman Sachs (Asia) L.L.C.

Richard Tang, CFA +852-2978-0722 [email protected] Goldman Sachs (Asia) L.L.C.

Sunil Koul +852-2978-0924 [email protected] Goldman Sachs (Asia) L.L.C.

Ketaki Garg +91(80)6637-8601 [email protected] Goldman Sachs India SPL

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended fordistribution to GS institutional clients only.

The Goldman Sachs Group, Inc. Global Investment Research

AU

CN

HK

IN

ID

KR

MY

PH SG

TWTH

0.1

0.2

0.3

0.4

0.5

0.25 0.3 0.35 0.4 0.45 0.5

Sen

sit

ivit

y

Correlation

Asian markets and global cycle

5

10

15

20

25

J-01 J-03 J-05 J-07 J-09 J-11 J-13

12-month forward P/E (MXCN)

November 21, 2013 Asia Pacific

Goldman Sachs Global Investment Research 2

Table of contents

Executive summary: Back on track 3

Market view changes: Upgrade China and Taiwan to Overweight 8

Implementation: Emphasizing earnings 14

Key questions for 2014 21

Performance context: Intra-regional differentiation at play 26

Macro: Return expectations, views, and path 29

Earnings: Back to trend growth in 2015 after 4 years of weakness 37

Valuations: Not much room for expansion except for China 43

Positioning: Potential for continuing shift to North Asia 46

Secular themes: Buy on dips 49

Events in 2014 and beyond 55

Appendix 1: Goldman Sachs macro forecasts 56

Appendix 2: Valuations at a glance 57

Appendix 3: China reform policies 58

Disclosure Appendix 62

The authors would like to thank Vincent Lau and Nitin Chanduka for their valuable contributions.

All prices in this report are as of November 18, unless mentioned otherwise.



Executive summary: Back on track

After a year of flat returns and dramatic underperformance vs. DM, we expect 2014 to

be a better year in absolute and relative terms. We believe earnings growth will be

the main performance driver since aggregate valuations are full. We favor China on

improving reform momentum, Korea and Taiwan for their exposure to better DM

growth, and three flavors of earnings growth (delta, value, and revenue-source).

Regional return. We expect the MXAPJ index to reach 525 by end-2014, implying

10% price and 13% total returns in USD. Earnings growth will be the key propellant,

but 3% weighted-average exchange rate depreciation and some valuation

compression may serve to offset some of the earnings gains. Within the region,

we upgrade China and Taiwan to Overweight and stay positive on Korea. Total

US$ returns for these markets could be 15% to 23%.

Expected path. Our 3m and 6m targets are 485 and 490, implying a modest start

to the year and a stronger 2H. Key influences are likely to be the timing and

magnitude of Fed tapering, the reaction to China’s reform policies, the political

calendar in markets like India and Indonesia, and whether corporate Asia is able to

deliver earnings. Policy decisions will be sensitive to high-frequency macro

indicators, which means markets will be data dependent and the price path noisy.

Key themes. The main macro themes we see are the improvement in global

growth to 3.6% from 2.8% (PPP terms) driven by the US, and the related tapering

of quantitative easing as US monetary policy begins to normalize. Within the

region, policy adjustment (China reform, south Asia macro tightening) and

politics will also impact markets. The key micro theme is the potential earnings

growth recovery in 2015 (which the market will anticipate in 2H14), driven in good

measure by supply side factors such as capex discipline and cost management.

Performance context. Regional equities are roughly flat for 2013 with wide

amplitude of intra-year swings. Performance is at the 36th percentile in absolute

terms relative to the MXAPJ’s 26-year history and the 20th percentile relative to DM

equities over the same time frame. Market rotation was greater than sector

rotation, and FX weakness reduced USD returns by 5%. Looking forward, we

expect currency to be an important component of returns (albeit less negative),

and expect meaningful market, theme and stock performance differentiation.

Earnings: key return driver. We expect earnings growth to accelerate back to

trend in 2015 after 4 years of sub-trend growth. Our top-down regional earnings

growth forecasts are 10% and 14% for 2014 and 2015 (EPS integers are $38.40 and

$43.70). These are 2% below and 4% above the respective consensus expectations.

Demand-side models have overestimated earnings recently, because the shortfall

has come from margins rather than revenues. Regional capacity utilization

currently stands at 67.3%, a full 10pp below the 77.6% level in the US, and this

excess capacity has depressed profitability. Capex discipline and moderating input

cost pressures should result in non-financial margins improving 50bp to 7% in

2015 after a 20bp uptick in 2014.

Valuation: Not much room for expansion. The region currently trades at 12.1x

forward 12m earnings and 1.6x trailing book value, about 0.7sd below the 10-yr

mean. However, cap-weighted valuations are distorted downwards by China SOEs

and Korea electronics stocks. Equal-weighted valuations are 31% higher at 15.9x

forward earnings, which is 0.8 sd above average and from which point historical

returns have been subdued. Macro models point to flat valuations relative to our

forecasts, and real earnings yield gaps also look fair relative to range. In sum, we

expect little valuation change in 2014: EPS growth will be the main return driver.



Positioning: Potential for continuing shift to N Asia. Regional equity flows

recovered after the mid-year selloff, with $28bn ytd inflows overall. India continues

to attract the highest flows ($17bn) with Korea and Taiwan next at $14bn

combined, and Thailand and Indonesia seeing net selling. Active positioning

remains biased towards south Asia, with mutual funds overweight India and

ASEAN by 495 and 948bp and underweight China, Korea and Taiwan by 582, 769

and 649bp. Given better macro characteristics relative to our global forecasts, we

see scope for added flows to N Asia and for flows from bonds to equities.

Risks: The principal macro threats to our more constructive stance are a) global

growth falling short of our expected improvement, b) more aggressive Fed policy

tightening, c) China faltering on reform implementation, d) politically-driven

volatility, e) an oil shock (we expect a benign price path), and f) contagion from

other EMs. The main micro risk is continuing earnings shortfall if Asian companies

are not able to deliver the margin recovery we expect.

Secular themes. Focal areas include:

o Digitalization of consumption: Smartphone demand, internet

commercialization, disruptive technologies like array cameras, and big

data and cloud computing.

o Urbanization: Includes infrastructure and healthcare.

o Green GDP: Environmental protection is emerging as a key China theme,

and includes alternative energy such as solar, gas, wind and hydro.

Key questions.

o Asia vs DM relative performance. Our forecasts for the key global

regions imply more equivalent returns in 2014 as opposed to the

lopsided performance in 2013. The region’s relative performance may

improve later in 2014 if earnings show signs of a pickup as we expect.

o ASEAN. We expect ASEAN to continue to lag the broader region after

outperforming from 2006 to 2012. 2H14 may be a better time to revisit

once the current cyclical macro adjustment is more mature.

o China internet and Macau gaming. These were the strong performers of

2013 and helped many investors perform. We advocate buying

corrections because the fundamental theme is powerful and not yet

mature.

o China banks. The top 10 country-sectors in the MXAPJ index account for

42% of market cap, meaning decisions in this area will have outsized

impact on relative performance. China banks are the fourth largest

country sector (after Australia banks and Taiwan and Korea tech). Risk is

to the upside near-term given reform momentum.

o Tech. Tech is the 2nd largest sector regionally, accounting for 15% of

market cap. We are overweight and expect ‘old tech’ to perform well,

along with ‘new tech’.

Markets: Raise China and Taiwan, continue to favor Korea

o Overweight

China: Upgrade: policy reform could raise valuation off low base

Korea: Attractive macro profile, mid-teens EPS growth, inexpensive

Taiwan: Upgrade: favorable macro exposure enhanced by high yield



o Market weight

India: Reduced external vulnerability, earnings holding up

Malaysia: Upgrade given moderating external risk and low vol; full vals

Philippines: Strongest ASEAN-4 fundamentals; valuations still high

Singapore: Downgrade: better alternatives in N Asia

o Underweight

Australia: Weak domestic fundamentals, significant AUD downside risk

Hong Kong: Challenges from QE exit; high valuation relative to China

Indonesia: Tighter policy to impact n/t growth; outlook better later in 2014

Thailand: Downgrade on macro/policy risks; earnings/valuations fair

Sectors: selected cyclicals

o Overweight: Autos, tech hardware & semis, banks, software, transport

o Market weight: Energy, health care, capital goods, insurance,

metals/mining, chemicals, retail

o Underweight: Real estate, utilities, staples, telecom

Implementation: Emphasizing earnings

o Markets: long Korea; HSCEI 3-month call spreads, China reform-

beneficiary basket

o Macro slices: global cyclicals vs. asset-sensitive financials (GSSZMSGC

vs. GSSZMSFA)

o Three flavors of earnings: Delta earnings (margin expansion); Value

earnings (attractively priced growth); Destination earnings (Europe-

exposed stocks)

o Secular themes: Plays on consumption digitalization, urbanization, green

GDP

o Derivatives: Preferred downside hedge is ASX 200 Mar-end puts.



Exhibit 1: We expect more balanced returns between regions in 2014

Note: TOPIX EPS is based on fiscal, not calendar years.

Source: Goldman Sachs Global Investment Research.

Exhibit 2: We prefer North Asia


Exhibit 3: Market scorecard

Note: Blue cells refer to favorable metrics, whilst grey cells refer to unfavorable ones. For GDP, blue (grey) cells indicate sharp acceleration (deceleration) vs 2013. For inflation, blue (grey) cells indicate sharp deceleration (acceleration) vs 2013. For sensitivity, blue cells refer to significant positive impact in equity market returns given changes in our Global Leading Indicator. For detail, please refer to Asia Pacific: Portfolio Strategy: Bridging macro to micro: 18 ideas for North Asia, October 24.

Source: FactSet, MSCI, Goldman Sachs Global Investment Research

Total Forward P/E

Price Price Target Price Return Return EPS Growth Current Year-End

Index 19-Nov-13 3-mo 6-mo 12-mo 3-mo 6-mo 12-mo (USD) 2014E 2015E Consensus 2014E

TOPIX 1,237 1,350 1,375 1,450 9 % 11 % 17 % 12 % 21 % 14 % 14.3 x 13.6 x

Stoxx Europe 600 323 330 340 360 2 5 12 19 14 13 13.5 12.9

MXAPJ 478 485 490 525 1 2 10 13 10 14 12.1 12.0

S&P 500 1,788 1,800 1,850 1,900 1 3 6 8 8 8 14.9 15.2

EPS growth (%) 12-month return forecasts (%)

Allocation Market Index

Index

level (Nov

18)

CY14E CY15E

Local

price

return

FX

change

Dividend

yield

USD

total

return

China HSCEI 11,307 10 11 10.0 13,600 20 -1 3 23

Taiwan TWSE 8,191 11 13 14.0 9,200 12 2 3 17

Korea KOSPI 2,011 15 15 9.1 2,350 17 -3 1 15

Singapore FSSTI 3,203 8 14 12.5 3,300 3 8 4 15

Malaysia FBMKLCI 1,792 8 10 15.3 1,950 9 0 3 12

Philippines PCOMP 6,343 8 16 15.5 6,300 -1 9 2 10

India NIFTY 6,189 12 18 13.7 6,900 11 -3 2 10

Indonesia JCI 4,394 12 17 13.0 5,000 14 -2 3 15

Thailand SET 1,424 9 11 11.8 1,510 6 -1 4 8

Hong Kong MXHK 13,310 6 9 15.0 14,100 6 -1 3 8

Australia AS51 5,385 8 11 14.5 5,900 10 -9 5 5

Asia Pacific ex Japan (USD) MXAPJ 478 10 14 12.0 525 12 -3 3 13

Asia ex Japan (USD) MXASJ 556 11 13 11.4 625 13 -1 3 15

Underweight

Target

P/E (X)

Index

target

Marketweight

Overweight

Ch

ina

Taiw

an

Ko

rea

Sin

gap

ore

Ma

lay

sia

Ph

ilip

pin

es

Ind

ia

Ind

on

esi

a

Au

str

ali

a

Th

ailan

d

Ho

ng

Ko

ng

2014 GDP growth (%) 7.8 3.8 3.7 3.8 5.0 6.3 5.0 5.3 2.0 4.2 3.7

2014 Inflation (%) 3.1 1.4 2.4 3.3 2.8 3.8 6.5 6.8 2.9 2.8 3.3

Sensitivity to global growth √ √ √ √

2014E-15E EPS CAGR (%) 11 12 15 11 9 12 15 15 10 10 8

NTM P/E (X) 9.3 14.1 8.8 14.1 15.5 18.5 14.4 13.3 14.5 11.9 15.0

LTM P/B (X) 1.5 1.8 1.2 1.5 2.2 3.1 2.5 3.1 2.0 2.2 1.3

Avg. of 10y Z scores for P/E & P/B (1.0) (0.2) (0.8) (0.4) 0.7 1.5 (0.6) (0.1) 0.1 0.5 (0.6)

Currency 12-mo chg vs. US$ (%) (0.6) 1.9 (3.4) 8.4 0.1 8.8 (6.0) (1.7) (9.3) (1.3) (0.6)

Positioning Asia-fund bp OW/UW √ √ √ X O O X O X X X

OW OW OW MW MW MW MW UW UW UW UW

Macro

Valuations

EPS growth



Exhibit 4: Cyclicals over defensives


Exhibit 5: China, Taiwan, Korea and 3 flavors of earnings

Source: Goldman Sachs Global Investment Research

GS Asia STAMP

Current STAMP Scores based on our macro views and latest dataMacro EPS Relative Current Current GS

Views Sentiment Valuation STAMP Score Allocation

Autos & Components √√ √√ √ √√ Overweight

Tech Hardware & Semis √√ x √√ Overweight

Banks √ √√ √√ Overweight

Software & Services √√ √√ xx √ Overweight

Transportation x Overweight

Energy √√ √√ √√ Marketweight

Health Care √ √ Marketweight

Capital Goods xx √ Marketweight

Insurance & other Financials √ Marketweight

Metals & Mining √ x Marketweight

Chemicals & other Materials xx x xx Marketweight

Consumer Retail & Services √ xx xx xx Marketweight

Real Estate x √ √√ Underweight

Utilities x xx x Underweight

Consumer Staples xx x xx Underweight

Telecom Services xx x √ xx Underweight

Current "Simplified"Macro Views

Growth: A mild pick upDom. vs. Extenal: ExternalInfl. vs. Growth: NeutralPolicy: Neutral

Current metric is:√√ Very favorable√ Favorable

Neutralx Negativexx Very Negative

Our trade recommendations

China: Reform beneficiaries; HSCEI 3-month call-spreads

Taiwan: Stock ideas in 'Old Tech'

Korea: EWY, KOSPI 200 6-month call-spreads

Macro slices Global Cyclicals vs Asset-Sensitive Fins. <GSSZMSGC vs. GSSZMSFA>

Margin expansion (Delta Earnings)

Growth at value (Value Earnings)

Europe-exposed (Destination Earnings)

Downside Hedge March expiry outright puts on ASX 200 (Australia)

Secular Themes Digitalization of consumption, Urbanization, and Green GDP

Style / Themes:

Earnings Growth

Markets



Market view changes: Upgrade China and Taiwan to Overweight

China: Upgrade to OW on improving reform momentum; 3 ways to

engage

We upgrade China to Overweight from Market weight for the following reasons:

The long-waited catalyst has materialized: A full plenary document was

released on November 15, a few days after the closure of the session. The detailed

document, which covers many specific commitments including market

deregulation/financial reform, fiscal and tax policy, safety nets/demographics,

urban/rural; and SOE reform, has reinvigorated market expectations on reform and

China’s longer-term growth prospects.

Reform momentum is likely to stay strong in the coming months: While we

are mindful of being carried away by policy-driven sentiment swings as the speed

and effectiveness with which the measures will be executed remains to be seen

and China still needs to work through numerous structural challenges, we believe

there is a reasonable chance that we may see a more concrete timetable and

implementation details to be announced at the ministry level in the coming

few months.

A decent fundamental configuration: Our economists expect China’s GDP to

grow 7.8% on a real basis in both 2014 and 2015, leading to stable 10% and 11%

EPS growth for China in those respective years based on our top-down forecast.

Inexpensive valuations: China currently trades on 9.3x forward P/E and 1.5x

trailing book, 0.9 and 1.1 s.d. to the attractive side of their respective 10-year

ranges. We fully acknowledge that low valuation is not always a strong argument

to turn bullish, but we think it is a tailwind for returns when catalysts emerge.

Light positioning: EPFR data suggests GEM- and Asia-focused funds are currently

underweight China by 290 bps and 582 bps respectively, suggesting favorable

positioning normalization risk.

Implementation: We recommend 3 ways to get upside exposure to China

o We continue to favor reform beneficiaries and highlight 9 buy-rated

stocks which revolve around the themes of mass market consumption,

healthcare, brokers and defense (Exhibit 8).

o Chinese banks, which are the fourth largest country-sector in MXAPJ, are

trading at very low absolute valuations (5.1X 2014E P/E, 0.9X P/B) and may

see asymmetric upside risk if more bank-specific reform policies are laid

out in the foreseeable future. We are OW banks at both regional market

and China levels.

o We recommend investors take advantage of moderate vol and elevated

call-skew (OTM calls expensive relative to ATM calls) by buying call-

spreads on HSCEI. 3-month 105/115% call-spreads currently cost 2.15%,

at 27% cost-savings to outright 105% calls (2.95%), much higher than

similar call-spreads on most markets globally. The trade provides a

maximum payout of 4.7x if HSCEI rallies 15% by expiry. Risks: Buyers of

105/115% call-spreads risk capped upside if HSCEI rises more than 15%

and loss of up-front premium if HSCEI rises less than 5% by expiry.

Key risks to our upgrade: Reform implementation falls short of market

expectation, and tighter-than-market-expected liquidity. Also see China: Portfolio

Strategy Research: Third Plenary: Ambitious blueprint to boost sentiment,

November 18.



Exhibit 6: Chinese banks are trading at attractive

valuation levels

Exhibit 7: Active managers are underweight China

Source: FactSet, EPFR, I/B/E/S, Goldman Sachs Global Investment Research

Source: FactSet, EPFR, I/B/E/S, Goldman Sachs Global Investment Research

Exhibit 8: We favor China reform-beneficiaries

* indicates the stock is on our regional Conviction List.

Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research

Exhibit 9: HSCEI call-skew has increased with OTM calls

trading expensive vs. ATM calls, compared to their

historical relationship

Exhibit 10: Call-spreads on HSCEI currently offer

meaningful cost savings (27%) unlike most major

markets globally



9.3

5yr z-score:

-0.73

12.1

5yr z-score:

-0.09

4

10

16

22

28

Ma

y-0

6

Au

g-0

6

No

v-0

6

Fe

b-0

7M

ay

-07

Au

g-0

7

No

v-0

7

Fe

b-0

8

Ma

y-0

8

Au

g-0

8

No

v-0

8

Fe

b-0

9M

ay

-09

Au

g-0

9

No

v-0

9

Fe

b-1

0M

ay

-10

Au

g-1

0

No

v-1

0

Fe

b-1

1M

ay

-11

Au

g-1

1

No

v-1

1

Fe

b-1

2

Ma

y-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3M

ay

-13

Au

g-1

3

No

v-1

3

MXCN 12m fP/E MXCN 12m fP/E ex. banks

Forward PE

-290

10yr z-score:

-0.32

-582

10yr z-score:

-0.89

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

Sep

-03

Fe

b-0

4

Ju

l-04

Dec-0

4

May-0

5

Oct-

05

Mar-

06

Au

g-0

6

Ja

n-0

7

Ju

n-0

7

No

v-0

7

Ap

r-08

Sep

-08

Fe

b-0

9

Ju

l-09

Dec-0

9

May-1

0

Oct-

10

Mar-

11

Au

g-1

1

Ja

n-1

2

Ju

n-1

2

No

v-1

2

Ap

r-13

Sep

-13

Fund Allocation (OW/ UW, bps)EM Funds Asian Funds

China

Bloomberg Name Reform Theme Sector

Listed

Mkt Cap

(US$ mn)

6M

ADVT

(US$ mn)

Price

(Quote)

GS

Rating

12m

Potential

+/(-)%

2013E

EPSg

(%)

2014E

EPSg

(%)

2014E

P/E

(X)

2014E

P/B

(X)

2014E

D/Y

(%)

6881 HK China Galaxy Financial reform Other financials 1,182 7 5.42 B 25% 21% 18% 13.0 1.2 2.0%

151 HK Want Want One child policy Cons. Stap. 18,487 20 10.84 B 15% 19% 20% 23.3 8.6 2.9%

2357 HK AviChina National defense Industrials 1,173 4 3.86 B 24% 20% 21% 19.3 1.6 1.0%

1193 HK China Resources Gas Environment protection Utilities 5,751 10 20.05 B* 22% 19% 22% 16.8 2.8 1.2%

270 HK Guangdong Investment Environment protection Utilities 5,263 7 6.54 B 31% 8% -4% 11.5 1.4 3.4%

958 HK Huaneng Renewables Environment protection Utilities 1,455 8 3.23 B -7% 106% 36% 14.1 1.5 1.2%

2196 HK Shanghai Fosun Pharm. Health care reform Healthcare 867 6 20.00 B -5% 4% 12% 17.4 2.1 1.5%

867 HK China Medical System Health care reform Healthcare 2,099 4 6.74 B* 26% 22% 25% 16.1 3.5 2.3%

700 HK Tencent Mass market consumption Internet 100,634 180 419.6 B* 7% 27% 28% 30.3 8.2 0.4%

Avg 16% 27% 20% 18.0 3.4 1.8%

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

1.02

1.04

Jan‐10

Apr‐10

Jul‐10

Oct‐10

Jan‐11

Apr‐11

Jul‐11

Oct‐11

Jan‐12

Apr‐12

Jul‐12

Oct‐12

Jan‐13

Apr‐13

Jul‐13

Oct‐13

HSCEI 3-mo call-wing skew(25-delta call / ATM vol)

42%

27%25%

23%

13% 13% 12%

7% 7% 6% 4% 4% 4% 3%2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Bovespa

HSCEI

Nikkei 225

TOPIX

NIFTY

RDXUSD HSI

KOSPI 200

S&P 500

EuroStoxx50

MSCI W

orld

TWSE

FTSE 100

MSC

I Sing

ASX

200

Call-spread cost-saving vs. calls(3-mo 105/115% call-spreads vs. 105% calls)



2) Taiwan: US + China exposures; upgrade to OW

We upgrade Taiwan to Overweight from Market weight for the following reasons:

A favorable macro profile: Top-down, we still feel very comfortable on how

Taiwan stacks up against its global and Asia EM peers: Taiwan’s leverage is not

excessive, the current account is in significant surplus (12% of GDP), the currency

is not overvalued and FX volatility is low, and the FX reserve (to GDP) provides a

strong liquidity cushion.

These characteristics should help Taiwan weather market volatility when investors

turn their attention to EM macro vulnerability and contagion risk, possibly when

the Fed begins to taper, which our economists expect will be in March 2014.

Compelling thematic exposures: In addition to Korea, we view Taiwan as an

efficient market to gain global cyclical exposures as its economy and equity market

are closely linked to the US (25% of revenue). Additionally, we feel China reform

optimism may have positive sentiment spillover to ‘China Plays’ in Taiwan,

including petrochem/materials, select financials, and tourism, which in aggregate

represent 16% of equity market revenue.

A more sustainable and balanced earnings growth profile in 2014: After

growing earnings by 27% in 2013 from a low base, Taiwan is likely to deliver a

more sustainable mid-teen EPS growth of 11% and 13% in 2014 and 2015 as

margins gradually recover to mid-cycle levels. Growth contribution is likely to be

more balanced than in previous years when upstream semi (TSMC) and select

non-tech sectors subsidized the losses from PC supply chain segments and the

petrochem industry.

Valuations are not low but should not be a key concern: Taiwan currently

trades on 14.1X forward P/E and 1.8X trailing book, 17% and 9% above the

regional aggregates (0.68 and 1.0 s.d.).

The high absolute and relative valuations have been a key consideration

preventing us from turning more positive on Taiwan, but given our economists’

rising conviction on DM recovery and Taiwan-specific merits (a favorable macro

profile, high and stable dividend yields), we feel the valuation burden should not

dismiss our positive investment case (and return expectation) on Taiwan which

will be driven primarily by fundamental earnings growth.

Light investor positioning: Similar to China and Korea, global- and Asia-focused

investors are underweight by a wide margin – 249bps by GEM funds and 649bps

by Asian-mandated funds. The recent FINI inflows of US$7.6bn since July look

high at the first glance, but less significant compared with the depth of the market.

A better year for ‘Old tech’. As we detail in the ‘Key questions’ section, we expect

'Old tech', which accounts for half of total market cap, to have a better year in

terms of absolute return as:

o Valuation has now reached arguably attractive levels, especially

relative to ‘New tech’ which focuses on software design and other tech-

related value-added services.

o Taiwan tech appears more favorably skewed towards a DM recovery story

given their revenue exposures there.

o Our analyst remains fundamentally bullish on TSMC (Buy, on Conviction

list), the largest stock in MSCI Taiwan (20%) and TAIEX (12%).



Exhibit 11: Taiwan’s macro profile looks solid relative to

global/Asia EMs

Exhibit 12: Taiwan’s fundamentals are well linked to the

US and China

Source: Haver, CEIC, MSCI, Goldman Sachs Global investment Research

Source: MSCI, Goldman Sachs Global investment Research

Exhibit 13: Growth contribution is likely to be more

balanced in 2014

Exhibit 14: Valuations are not low but shouldn’t be a

major concern

Source: I/B/E/S, MSCI, Goldman Sachs Global Investment Research

Source: FactSet

Exhibit 15: Stocks we highlight in Taiwan

B* indicates the stock is on Conviction Buy list.

Source: I/B/E/S, Lionshare, FactSet, Goldman Sachs Global Investment Research

86%

68%

25%

12%

-14%

37%

22%

9%1%

10%

20%

44%

8%

0%

8%

-20%

0%

20%

40%

60%

80%

100%

FX reserve/GDP

(%)

GDPg correl. with

the US

Sales Exp. to the

US

C/A as % of GDP

(%)

FX over-

/undervaluation

Taiwan AeJ EM

(%)

25%19%

12% 9% 8% 6% 8%3% 3%

12%

16%

3%11% 13%

8% 9%3%

5%1%

9%

10%

14% 13% 12%

9%8%

6%5%

4%

11%

0%

10%

20%

30%

40%

50%

60%

Taiw

an

Ind

ia

Ko

rea

Ho

ng

Ko

ng

Au

str

alia

Sin

ga

po

re

Ph

ilip

pin

es

Mala

ysia

Th

ail

an

d

MX

AP

J

MSCI Indexes Revenue Exposure (%)

% from EU % from CN % from US

-7%3%

32%

8%13%

25%

25%20%

11%

24% 19%

9%

17%15%

7%

13%11%

3%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013E Earnings 2014E Earnings 2014E Earnings

Growth

Contribution

Technology Distributors

wafer

PCB

Solar power

Other Tech

IC packaging and testing

Acer

Consumer electronics

LED

Touch screen

ODM/OEM

Other components (NB)

Fabless design

Foundry

Others

Financials

Petrochem

TFT-LCD (panel)

8.0

10.0

12.0

14.0

16.0

18.0

20.0

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%N

ov

-03

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

Fwd PE Prem/ Disc (%)

Fwd PE Prem/ Disc (MXTW vs. MXAPJ)

MXTW - 12M forward P/E

fPE: 14.1X

5-yr z-score: 0.42

Forward PE (X)

Ticker Name Sector

Listed Mkt

Cap (US$

mn)

6M

ADVT

(US$

mn)

Price

(Quote)

GS

Rating*

12m

Pot.

+/(-)%

14E

EPSg

(%)

Agg. EM

Funds

OW/UW

(bps)

5yr

avg.

ROE

5yr

avg.

CROCI

14E

P/E

(X)

5yr

PE z-

score

14E

P/B

(X)

2330 TT TSMC Semi 91,212 116 104.00 B* 25% 16% 14.5 23% 18% 12.5 -0.2 2.7

2317 TT Hon Hai Comp. H/W 33,440 81 75.30 B 17% 3% -76.2 16% 13% 9.4 -0.5 1.1

2308 TT Delta Elec Comp. H/W 11,838 23 144.00 B 17% 27% -23.2 19% 24% 15.7 0.9 3.3

2891 TT Chinatrust Fin. Banks 9,406 21 18.90 B* 22% 21% -23.1 9% - 11.3 -0.2 1.3

2311 TT Advanced Semi Semi 7,897 19 30.10 CS - 23% -15.7 14% 10% 12.5 -0.2 1.8

3008 TT Largan Comp. H/W 4,510 45 994.00 B 36% 18% -9.1 26% 41% 12.6 -1.1 3.3

2474 TT Catcher Tech. Comp. H/W 4,507 38 177.50 B 7% -3% -9.5 17% 14% 10.4 -0.5 1.8

2823 TT CH Life Insur. (TW) Insurance 2,555 12 27.75 B 23% 7% -5.2 18% - 12.6 -0.5 1.5

2439 TT Merry Electronics Comp. H/W 640 8 107.50 B* 35% 60% 0.1 11% 14% 12.2 1.2 2.8

Avg 23% 19% -16.4 17% 19% 12.1 -0.1 2.2

TW Avg - 11% -6.9 11% 14% 17.8 0.6 2.2

Ta

iwan



3) Korea: A global cyclical recovery play; reiterate Overweight

We reiterate our Overweight stance for Korea’s leverage on the global cyclical recovery.

Our end-2014 target for KOSPI is 2,350, implying 17% upside. Our arguments are as

follows:

Macro: well positioned for DM recovery, improving domestic sentiment.

Korea is among the markets that are most leveraged to the global macro cycle. In

value-added terms, the US and Europe are the two largest markets for Korea

exports. Our economists expect GDP growth to accelerate to 2.9% in 2014 from

1.7% in 2013 in the US, and 1.1% from -0.4% in the Euro area. China, the third

largest export destination for Korea, will likely maintain stable growth in our view.

We are also seeing early signs of a pickup in domestic demand after a long period

of weakness. Housing markets have gradually improved, imports of machinery

have further risen, and credit expansion has resumed. Given the “twin engines”

of growth, we expect GDP growth to accelerate to 3.7% next year from 2.9% in

2013.

Earnings: highest growth in the region. We forecast 15% EPS growth in Korea

each in 2014 and 2015, compared to consensus of 20% and 11%. Although some

moderate negative revisions are likely, we expect Korea will still be the market

with the fastest earnings growth in the region next year. Even without valuation

expansion, Korea should be able to deliver decent returns just “riding on

earnings”.

Valuation: attractive relative to the region. Korea is currently trading at 8.8X

forward P/E and 1.2X trailing P/B, which are 0.5 and 1.2 s.d. below the 10-year

average. It is also trading at a deep discount to the region (27% for P/E and 32%

for P/B). Although relative valuations have risen, they are only 13% and 18%

above trough levels. We believe there is potential for further valuation expansion.

Positioning: potential for inflow to continue given funds’ underweight. Year-

to-date, foreigners have bought US$6.5bn of Korean equities. Despite the inflows,

mutual funds remain strongly underweight the market (by 769bp). Given light

investor positioning, we see potential for more inflows.

Implementation: Buy EWY (US-listed ETF); prefer KOSPI 200 call-spreads for

asymmetric exposure. We suggest buying EWY (US-listed ETF on MSCI Korea) as

a direct way to position for long exposure in Korea. Although EWY is US-

denominated and hence exposed to FX risk, we see modest depreciation pressure

on KRW next year.

Investors who can trade derivatives and want to limit any downside risk can take

advantage of low implied volatility. 6-month implied vols on KOSPI 200 are

currently trading at 15.4v, which is less than 1 vol point above its lows (14.8v) and

in the 3rd percentile of its history since 2007. We prefer call-spreads to outright

calls. 6-month 105/115% call-spreads on KOSPI 200 currently cost 1.9% with

maximum potential payout of 5.3x. Risks: Buyers of 105/115% call-spreads risk

capped upside if KOSPI 200 rises more than 15% and loss of up-front premium if

KOSPI 200 rises less than 5% by expiry.



Exhibit 16: “Twin engines” of growth: DM recovery and

improving domestic sentiment to lift GDP growth in 2014

Exhibit 17: We expect Korea to deliver the strongest

earnings growth in the region

Source: Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research.

Source: Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research.

Exhibit 18: Korea’s valuations remain attractive vs. the

region

Exhibit 19: Active managers are still underweight the

market

Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research

Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research

8.7

7.6

4.5 4.94.3

3.5 3.6 3.42.8

2.41.6 1.5 1.5

2.33.3

4.2 4.2 3.9 3.6 3.3

0.01.02.03.04.05.06.07.08.09.0

10.0

201

0-1

Q

201

0-2

Q

201

0-3

Q

201

0-4

Q

201

1-1

Q

201

1-2

Q

201

1-3

Q

201

1-4

Q

201

2-1

Q

201

2-2

Q

201

2-3

Q

201

2-4

Q

201

3-1

Q

201

3-2

Q

201

3E

-3Q

201

3E

-4Q

201

4E

-1Q

201

4E

-2Q

201

4E

-3Q

201

4E

-4Q

Real GDP (yoy)

Korea

15%

12%12%

11%10%

9% 8% 8% 8% 8%

6%

10%

4%

6%

8%

10%

12%

14%

16%

Ko

rea

Ind

on

esia

Ind

ia

Taiw

an

Ch

ina

Th

ail

an

d

Au

str

ali

a

Ph

ilip

pin

es

Ma

lay

sia

Sin

gap

ore

Ho

ng

Ko

ng

MX

AP

J

2014E EPS growth (%)

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

No

v-9

5

No

v-9

6

No

v-9

7

No

v-9

8

No

v-9

9

No

v-0

0

No

v-0

1

No

v-0

2

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

Valuation Prem/ Disc (MXKR vs MXAPJ)

Trailing PB Prem/ Disc

Fwd PE Prem/ Disc

-25%

10yr z-score:

-0.29

-31%

10yr z-score:

-1.24

-1200

-800

-400

0

400

800

1200

Oct-

03

Ap

r-04

Oct-

04

Ap

r-05

Oct-

05

Ap

r-06

Oct-

06

Ap

r-07

Oct-

07

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

ASEAN India

Hong Kong China

Korea Taiwan

Asia-fund

OW/UW (bps)



Implementation: Emphasizing earnings

1) Earnings growth: Stylistic and thematic implementation

One of our core themes for 2014 is seeking earnings growth without too much exposure to

valuation risk. We highlight three different flavors of earnings-related implementation: a)

Delta Earnings (Margin expansion) b) Value earnings (attractively priced growth) and c)

Destination earnings (Europe-exposed stocks), as described in detail below.

a) Margin expansion Identifying cyclical margin recovery and structural margin expansion stocks:

We believe the magnitude of margin improvement next year will remain mild, but

that it will be much stronger in 2015. Despite this, we see a few sectors with

potential for early margin recovery on improving demand/supply dynamics.

Together with names that have structural margin expansion stories, we highlight a

list of 12 stocks in the region (Exhibit 20).

Entry points matter: Within our list, some China names have rallied sharply along

with the overall market on reform enthusiasm. While we are confident on their

improving margin outlook, we suggest investors wait for better entry levels.

Appealing growth/valuation profile: Our analysts forecast these stocks overall

will see 2014 earnings growth accelerating to 18% (from 1% in 2013), and they are

trading at 10.8X 2014E P/E on median. Their growth/valuation profile thus looks

favorable compared to the overall market.

Exhibit 20: Stocks whose earnings may benefit from expanding margins



Ticker Name Country Sector

Listed Mkt

Cap (US$

mn)

6M

ADVT

(US$ mn)

Price

(Quote)

GS

Rating

12m

Potential

+/(-)%

2013

EPSg

(%)

2014

EPSg

(%)

2013

NM

(%)

2014

NM

(%)

2015

NM

(%)

2014

P/E (X)

2014

P/B (X)

2014

D/Y

(%)

005380 KP Hyundai Motor Korea Autos 51,576 96 249000 B 18% 1% 14% 10% 10% 11% 5.6 0.9 0.8%

TTMT IS Tata Motor India Autos 16,437 53 386 B* 18% 34% 18% 7% 7% 7% 6.8 1.8 0.2%

914 HK Anhui Conch Cement China Materials 4,567 39 27.25 B* 19% 32% 18% 16% 17% 18% 11.5 1.8 1.7%

3323 HK China National Building Material China Materials 2,822 36 7.60 B 30% 9% 31% 5% 6% 7% 4.0 0.8 3.7%

SMM SP Sembcorp Marine Singapore Industrials 7,394 10 4.41 B 20% -1% 53% 10% 11% 11% 12.1 2.9 4.1%

2039 HK China Itnl' Marine Containers China Industrials 2,601 2 14.10 B 16% -36% 90% 2% 3% 5% 12.5 1.3 2.4%

012630 KP Hyundai Dev. Korea Industrials 1,701 7 24000 B* 13% NM NM -3% 5% 5% 8.2 0.8 4.2%

386 HK Sinopec China Oil and gas 21,388 67 6.50 B 12% 17% 14% 3% 3% 3% 6.8 1.0 5.8%

023530 KP Lotte Shopping Korea Retailing 11,164 13 377000 B 17% -9% 11% 3% 4% 4% 10.1 0.6 0.4%

2331 HK Li Ning Co. Ltd. China Retailing 1,169 5 6.62 B 30% -85% -115% -6% 1% 5% 125.5 2.5 0.0%

2439 TT Merry Elec. Taiwan Retailing 640 8 108 B* 35% 102% 60% 9% 12% 13% 12.2 2.8 3.5%

347 HK Angang Steel China Steel 682 9 4.87 B* 31% -130% 90% 2% 3% 5% 11.8 0.6 4.5%

Median 18% 1% 18% 4% 5% 6% 10.8 1.2 3.0%



b) Growth at value We classify the bottom 25 percentile of stocks based on Forward PE as Value stocks and

top 25 percentile of stocks based on sales growth in each market as Growth stocks and

make the following observations:

Growth has outperformed value 9 years in a row (Exhibit 21).

Growth looks quite expensive relative to value (51% PE and 44% PB premium), but

growth remains scarce, and value stocks could be a trap given low ROEs.

We prefer select growth stocks with reasonable valuations. We screen the bottom

25th percentile of stocks among Growth stocks based on their P/E. The combined

Growth+Value strategy has performed better than either Growth or Value

individually. We highlight Sembcorp Marine, Largan Precision, Tata Motors and

Geely as stocks that screen well within our list (Exhibit 25).

Exhibit 21: Growth has outperformed value 9 years in a

row

Exhibit 22: Value stocks are valued at high discounts to

growth stocks

Source: DataStream, FactSet, Goldman Sachs Global Investment Research


Exhibit 23: The combined growth+value strategy has

performed even better

Exhibit 24: Value has low ROE but growth seems

expensively priced



-60%

-30%

0%

30%

60%

90%

120%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013Y

TD

Annual Return (%)

Value Growth MXAPJ

-15%

0%

15%

30%

45%

60%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

201

3 (

Cu

rr.)

Growth vs. ValueRel Fwd PE Prem/ Disc

Growth stocks

more expensive

80

100

120

140

160

180

200

Ja

n-1

0

Mar-

10

May-1

0

Ju

l-10

Sep

-10

No

v-1

0

Ja

n-1

1

Mar-

11

May-1

1

Ju

l-11

Sep

-11

No

v-1

1

Ja

n-1

2

Mar-

12

May-1

2

Ju

l-12

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

May-1

3

Ju

l-13

Sep

-13

Rebased Index

Value Growth

Growth (Value) MXAPJ

Value vs Growth

Value Growth MXAPJGrowth

(+Low fPE)

2014 EPSg 9.9% 20.1% 12.1% 20.2%

2015 EPSg 9.3% 16.5% 10.2% 13.0%

2014 SPSg 6.8% 18.7% 7.0% 20.5%

2015 SPSg 6.4% 15.3% 6.0% 11.1%

Fwd PE 9.8 14.9 12.6 9.2

10yr z-score (0.58) 0.76 (0.28) (0.36)

Trailing PB 1.4 2.0 1.7 1.2

10yr z-score (1.21) (0.33) (0.87) (0.86)

Return (Ytd) 1.0% 10.4% 3.1% 5.1%

Volatility (10Y, Ann.) 25% 26% 27% 30%

Sharpe Ratio (10Y, Ann.) 0.66 1.06 0.32 1.23

Fu

nd

em

en

tal

Va

luati

on

Pri

ce



Exhibit 25: Growth stocks at modest valuations



c) Europe-exposed stocks

While our Global Cyclicals thematic slice is largely concentrated in the Info Tech sector, we

also look at specific stocks that have high revenue exposures to DM (US and Europe) and

should therefore benefit from a meaningful recovery in external demand. We note that US-

exposed stocks (with at least 35% revenue exposure to the US) have risen 16% on an

average from June lows (vs. 12% for MXAPJ) and outperformed MXAPJ by 12% year-to-

date. On the other hand, the Europe-exposed stocks have lagged underperforming MXAPJ

by 11% year-to-date. Our economists forecast expansion in Euro area GDP of 1.1% in 2014

and 1.5% in 2015 coming after two years of contraction in output, which should bode well

for our EU-exposed stocks, in our view.

We highlight a list of 18 stocks with at least 30% revenue exposure to Europe and that are

currently trading at less than 20x P/E on 2014 expected earnings (Exhibit 26). The portfolio

has an average revenue exposure of 43% to Europe, compared to 8% for the overall region.

With 20.5% EPS growth and 13.1x P/E for next year (PEG ratio of 0.64), our Europe-exposed

portfolio offers a better growth/valuation profile than the overall region on average (15.9x

avg. P/E, 16.7% avg. EPS growth and PEG ratio of 0.95). The growth/valuation profile of our

Europe-exposed portfolio is also higher than the US-exposed basket with an average

revenue exposure of 51% to US and PEG ratio of 0.9 (16.5x avg. P/E and 19% EPS growth).

>75th

Percentile<15X

Ticker Name Country Sector

Listed

Mkt Cap

(US$ mn)

6M

ADVT

(US$ mn)

Price

(Quote)

GS

Rating

12m

Potential

+/(-)%

2014E

EPSg

(%)

2015E

EPSg

(%)

2014E

SPSg (%)

Fwd PE

(X)

2014E

P/E (X)

2014E

P/B (X)

2014E

D/Y

(%)

2014E

ROE

(%)

2015E

ROE

(%)

037620 KP Mirae Asset Korea Insur. & other fin. 1,272 4 32300 NC - 66% 10% 69% 8.1 7.8 0.6 2.5% 8% 8%

SMM SP Sembcorp Marine Singapore Industrials 7,394 10 4.41 B 20% 26% 8% 28% 14.2 14.0 3.0 3.9% 22% 21%

PGAS IJ PT Perusahaan Gas Indonesia Utilities 10,118 13 4850 N 3% 31% 8% 25% 10.7 10.5 3.3 5.0% 32% 29%

813 HK Shimao Property China Property 8,509 17 19.00 B 3% 25% 15% 23% 6.6 6.5 1.1 4.7% 17% 17%

3008 TT LARGAN Precision Taiwan Computer H/W 4,510 45 994 B 36% 15% 12% 20% 13.0 12.9 3.7 3.0% 29% 27%

HCLT IS HCL Technologies India I.T. services 11,988 22 1086 B 22% 24% 12% 20% 12.8 12.7 3.5 1.4% 28% 25%

1 HK Cheung Kong Hong Kong Property 36,175 58 121 B* 19% 8% 6% 18% 9.4 9.3 0.7 2.8% 8% 8%

TTMT IS Tata Motors India Autos 16,437 53 386 B* 18% 22% 12% 15% 8.2 8.0 2.0 0.6% 24% 22%

3968 HK China Merc. Bank China Banks 9,071 42 15.32 B* 28% 6% 13% 15% 5.6 5.6 1.0 4.9% 18% 17%

175 HK Geely Automobile China Autos 4,518 33 3.98 B* 31% 14% 13% 15% 8.8 8.7 1.5 1.6% 17% 16%

Avg 24% 11% 25% 9.7 9.6 2.0 3.0% 20% 19%

APJ Avg. 17% 16% 11% 15.9 15.4 2.4 2.9% 15% 15%



Exhibit 26: We expect Europe-exposed Asian stocks to benefit as external demand recovers

Criteria: EU sales exposure > 30%, 2014 P/E < 20x

Note: B= Buy, N= Neutral, NC=Not Covered; * denotes stock is on our Regional Conviction List

Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research.

Exhibit 27: While US-exposed stocks have outperformed, Europe-exposed stocks have lagged in the recent rally

Note: Europe-exposed stocks comprises of Asian stocks with more than 30% sales exposure to Europe; US-exposed stocks comprises of Asian stocks with more than 35% sales exposure to US


Ric Name

EU Sales

Exposure Market Sector Curncy

Price

(Quote)

Listed

market cap

(US$ mn)

3M ADVT

(US$ mn) GS Rating 2014 P/E

2014 EPS

Growth

HGG.AX Henderson Group 90% Australia Financials AUD 3.79 3,948 10.4 B 14.8 11.9

VARD.SI Vard Holdings 80% Singapore Industrials SGD 0.83 776 3.1 N 8.1 40.2

028050.KS Samsung Engineering 63% Korea Industrials KRW 64,800 2,460 30.0 N 14.1 -

AMC.AX Amcor 55% Australia Materials AUD 11.12 12,608 38.5 N 15.6 15.5

TEML.NS Tech Mahindra 51% India Software and services INR 1,734 6,144 34.4 B* 12.7 14.0

0013.HK Hutchison Whampoa 46% Hong Kong Industrials HKD 95.9 52,071 66.7 B 12.1 12.2

SCMN.SI Sembcorp Marine 46% Singapore Industrials SGD 4.41 7,394 9.4 B 14.0 26.0

006360.KS GS Engg & Construction 42% Korea Industrials KRW 32,200 1,525 17.0 N 14.3 -

BIOS.SI Biosensors International 40% Singapore Health Care SGD 0.89 1,205 2.6 N 14.2 4.4

000210.KS Daelim Industrial 38% Korea Industrials KRW 96,000 3,177 18.5 N 7.9 19.0

TISC.NS Tata Steel 38% India Steel, aluminium INR 386.1 5,762 48.0 NC 10.0 50.7

BXB.AX Brambles 35% Australia Industrials AUD 9.30 13,631 40.5 B 17.7 14.0

ITMG.JK PT Indo Tambangraya 34% Indonesia Oil and gas IDR 31,200 3,151 2.8 N 11.0 30.4

2439.TW Merry Electronics Co. 34% Taiwan Consumer Discretionary TWD 115 640 9.9 B* 12.8 55.3

IOIB.KL IOI Corp. Bhd. 33% Malaysia Consumer Staples MYR 5.46 10,937 7.2 N 17.9 1.7

0005.HK HSBC Holdings 32% Hong Kong Banks HKD 86.3 206,973 128.1 B 10.9 7.2

REDY.NS Dr. Reddy's Laboratories 30% India Health Care INR 2,464 6,610 12.5 CS 18.8 14.5

2018.HK AAC Technologies 30% China Offshore Comp. hardware/assemblers HKD 31.5 4,846 22.9 B 11.4 2.6

43% 13.1 20.5

8% 15.9 16.7

Europe-exposed stocks (Average)

MXAPJ (Equal-weight, Avg.)

80

90

100

110

120

130

140

150

Jan‐12

Mar‐12

May‐12

Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

May‐13

Jul‐13

Sep‐13

Nov‐13

MXAPJ

Europe-

exposed stocks

US-exposed

stocks

STOXX

600

85

90

95

100

105

110

115

120

125

130

75

80

85

90

95

100

105

110

115

Jan‐12

Mar‐12

May‐12

Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

May‐13

Jul‐13

Sep‐13

Nov‐13

MXAPJ

(rhs)

Europe-exposed stocks

vs. MXAPJ

(Equal-weighted)



2) Global Cyclicals vs. Asset Sensitive Financials

We recommended Global Cyclicals vs. Asset Sensitive Financials as one of our preferred

trades for the fourth quarter. So far, the trade has gained 5% while the MXAPJ has posted

flat returns. We continue to like this trade for 2014 as we believe Asian equities will benefit

next year from a moderate improvement in growth (largely helped by the recovery in the

US and EU) while liquidity will marginally tighten (Fed tapering and domestic policy

normalization). The net impact should be positive for areas with export orientation and

high revenue exposures to external demand while negative for asset price inflation. Along

these lines, the Global Cyclicals and Asset Sensitive Financials (which largely includes

property stocks) remain at opposite ends.

The entry point of the long/short trade still looks attractive with almost 13% upside to 2011

highs. In addition to this, growth/valuations profile for Global Cyclicals is also better than

that of Asset Sensitive Financials. Global Cyclicals trade at 9.8x forward P/E, which is a

20% discount to Asset Sensitive Financials (at 12.5x forward P/E). With 2014 EPS growth

of 16%, Global Cyclicals offers higher growth at a lower price (PEG ratio of 0.6) than both

Asset Sensitive Financials (PEG ratio of 1.0) and the overall region (PEG ratio of 1.1).

Exhibit 28: Global Cyclicals vs. Asset Sensitive Financials theme could continue to generate alpha as external demand

recovers and monetary policy normalizes

Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research

Exhibit 29: Global Cyclicals offer better growth at lower price than both Asset Sensitive Financials and broader region

Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research

90

95

100

105

110

115

120

125

130

Dec-0

9

Ma

r-10

Ju

n-1

0

Sep

-10

Dec-1

0

Ma

r-11

Ju

n-1

1

Sep

-11

Dec-1

1

Ma

r-12

Ju

n-1

2

Sep

-12

Dec-1

2

Ma

r-13

Ju

n-1

3

Sep

-13

Dec-1

3

Global Cyclicals vs. Asset Sensitive Financials

(Relative performance, indexed)

GSSZMSGC / GSSZMSFA

0.5

1.0

1.5

2.0

2.5

3.0

3.5

(1.00) (0.50) 0.00 0.5 1.0 1.5 2.0 2.5 3.0

US

Gro

wth

Se

nsi

tivi

ty

US Rates Sensitivity

Global Cyclicals

Rate-Sensitive Financials

Asset-Sensitive Financials

Commodity Cyclicals

Defensives

Domestic Cyclicals

Size of bubble indicates sensitivity to China Growth

6X

8X

10X

12X

14X

16X

18X

20X

22X

24X

26X

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

NT

M P

E

Global Cyclicals Asset-Sensitive Financials

Global Cyclicals are

trading at 20%

discount to Asset

Sensitive Financials

Global

Cyclicals

Asset-

Sensitive

Financials

MXAPJ

Valuation

P/E (NTM) 9.8 12.5 12.1

10yr Z-score P/E (NTM) (1.1) (0.9) (0.3)

Consensus Earnings

Growth

2013E (%) 19.2 4.9 7.02014E (%) 16.0 12.7 11.1

P/E to EPS growth

ratio

2014E (X) 0.6 1.0 1.1



3) Preferred downside hedge: Buy ASX 200 Mar-end 95% puts

Given the potential event risk in the early part of the year regarding timing and magnitude

of Fed tapering (our expectation is for tapering to begin in March), we highlight our

preferred hedge for investors looking to limit downside risk. We recommend buying

March-expiry outright puts on ASX 200 given our cautious stance on Australian equities

on weak domestic fundamentals coupled with inexpensive option pricing and attractive

risk-reward to recent lows. We summarize our key arguments below:

Implied vol is low globally and currently trading in the bottom decile of its 7-

yr history across most markets. Short-dated implied vols have declined

significantly over the last few months with 3-month ATM implied vol on most

markets currently trading in the bottom decile of its 7-year history.

We prefer outright puts to put-spreads given low vol and moderate skew.

Short-dated put -skew is still low, trading below average in most markets.

Consequently cost savings on put-spreads is currently less significant. Outright

puts thus offer better risk-reward for hedging, in our view.

ASX 200 is more sensitive to a taper surprise given significantly higher

weighting in the high-yield defensives. The high-yield defensive parts of the

market may potentially come under pressure from Fed tapering. ASX 200 has

around 60% weighting in the high-yield defensives (dividend yield > 4%, beta <1)

significantly higher than other major markets globally and thus is more sensitive

to taper surprise in our view (Exhibit 32).

ASX 200 puts are currently the most inexpensive across major markets

globally. Indicatively March-end expiry 95% puts on ASX 200 currently cost 1.55%,

the least expensive across markets globally.

ASX 200 puts offer best payouts if markets revert to their recent lows. Given

event risk of potential Fed tapering, we look at the payouts (return on premium

paid) on various March-end expiry 5% OTM put options if indices were to revert to

their recent lows in late June / early July. Based on this metric, ASX 200 puts

would provide a return of 465% on premium paid, the highest across major

markets we track globally.

Risks: ASX 200 95% put buyers risk loss of upfront premium if index falls less than

5% by March-end expiry.

Exhibit 30: ASX 200 puts are the most inexpensive across

major markets globally

Exhibit 31: ASX 200 puts offer best returns if markets

revert to their respective lows in June/July this year



0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

EWZ

Nikkei 225

RDXUSD

EEM FXI

EWY

HSCEI

EWJ

EuroStoxx50

Bovespa

HSI

NIFTY

S&P 500

FTSE 100

KOSPI 200

TWSE

ASX

200

Indicative cost of Mar-end 95% puts(as % of spot)

‐50%

50%

150%

250%

350%

450%

550%

ASX

200

EuroStoxx50

EWY

Bovespa

KOSPI 200

HSI

S&P 500

HSCEI FXI

Nikkei 225

EWJ

RDXUSD

FTSE 100

EEM

EWZ

NIFTY

TWSE

Return on premium paid at expiry(if markets revert to their respective June/July lows)



Exhibit 32: ASX 200 has significantly higher weighting in

the high-yield defensives vs. rest of the world

Exhibit 33: Implied vol is low across markets and

currently trading in the bottom decile of its 7-yr history

Source: FactSet, local exchanges, MSCI, Goldman Sachs Global Investment Research


57

36

28

13

7

0

10

20

30

40

50

60

Australia UK Canada Europe US

Country wgt. in defensive

high yield

Country-weight in high-yield defensives(Div. yield > 4%, beta < 1)

10

20

30

40

50

60

70

80

Jan‐07

Jun‐07

Nov‐07

Apr‐08

Sep‐08

Feb‐09

Jul‐09

Dec‐09

May‐10

Oct‐10

Mar‐11

Aug‐11

Jan‐12

Jun‐12

Nov‐12

Apr‐13

Sep‐13

AEJ 3-month ATM implied vol (%)(Avg. of KOSPI 200, HSI, HSCEI, NIFTY,

TWSE and ASX 200)

%tile since 2007: 5%



Key questions for 2014

Will Asia recover its underperformance vs. DM in 2014?

We believe Asia’s relative performance may improve if it can deliver the earnings

growth that we expect it to in 2014 and 2015, given:

o A low starting point: Asia (MXAPJ) has trailed the world index since mid-2010. In

2013 (ytd), Asia has lagged the global benchmark by 17pp, the 20th percentile over

the past 25 years. This underperformance has been driven by compression in

relative valuation, which has retreated to 2005 levels in term of forward P/E.

o A better fundamental configuration: Our forecasts imply a more balanced return

profile among major equity markets globally, suggesting Asia is better

positioned fundamentally relative to DM in 2014 than in the past few years.

o Earnings recovery in Asia: Asia has struggled to grow earnings in the past 3 years.

While its DM peers have as well, investors seem to have traded weak margins

more than solid topline growth in Asia, leading to valuation de-rating. We forecast

Asia’s EPS to grow 10% and 14% in 2014/2015, with margins modestly expanding

in 2014 and further in 2015.

o Narrowing policy gaps: We expect the US to start normalizing its policy in 2014,

whereas Asia is already at a more mature tightening cycle. The closing gaps may

help support Asia’s relative returns, especially if the risks of tapering are better

reflected in asset prices than in summer 2013, as we argue in the macro section.

Exhibit 34: Asia has lagged the world index since 2010

Exhibit 35: Asia’s P/E discounts are back to 2005 levels

now

Exhibit 36: Margins will likely further recover in Asia

Exhibit 37: Policy gaps between DM and Asia may

narrow


50

75

100

125

150

175

200

225

Ja

n-0

0

Ap

r-0

1

Ju

l-0

2

Oct-

03

Ja

n-0

5

Ap

r-0

6

Ju

l-0

7

Oct-

08

Ja

n-1

0

Ap

r-1

1

Ju

l-1

2

Oct-

13

Relative Performance Index (MXAPJ vs. MXWO)

-26pp

2013ytd rel. return: -17pp

(20th percentile in annal rel. return)

144

14.4

10yr z-score:

0.51

12.1

10yr z-score:

-0.27

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

-40%

-30%

-20%

-10%

0%

10%

20%

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

Fwd PE Prem/ Disc (MXAPJ v.s MXWO) MXAPJ vs. MXWO

The World index

MXAPJ

Forward PE (X)

-16%

10yr z-score:

-0.90

-10%

0%

10%

20%

30%

40%

50%

60%

-10%

0%

10%

20%

30%

40%

50%

60%

201

0

201

1

201

2

20

13

E

20

14

E

20

15

E

201

0

201

1

201

2

20

13

E

20

14

E

20

15

E

Consensus EPSg Consensus NM Consensus SPSg

MXWO MXAPJ

Less Margin

Compression

4.44.3

4.3

1.7

2.12.3

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Fe

b-0

9

Ju

l-0

9

De

c-0

9

May

-10

Oct-

10

Ma

r-1

1

Au

g-1

1

Ja

n-1

2

Ju

n-1

2

No

v-1

2

Ap

r-1

3

Se

p-1

3

Fe

b-1

4

Ju

l-1

4

De

c-1

4

5Y govt yield (%)

Yield Gap (RHS) Asia (GDP-weighted) US

Yield Gap (%)



Will ASEAN regain momentum in 2014?

We believe it may continue to lag the region in 2014 after having outperformed

from 2006 to 2012. 2H14 could be a better time to revisit.

We believe the classic EM growth story remains intact for the ASEAN region:

Favorable base effect, ample room for productivity enhancement, strong demographics,

and much stronger balance sheet than in the previous crisis period (e.g. AFC).

However, a few factors could pressure equity returns cyclically:

o Indonesia and Thailand need to slow excess credit growth, which has been

running hot in recent years. Also, they have to trim their current account deficits

further, mainly through suppressing domestic demand (i.e. higher policy rates,

demand-side tightening).

o These macro adjustments mean growth estimates may need to be revised down

further, leading to lower EPS growth. Our earnings forecasts for ASEAN markets

are generally below consensus in 2014; and

o ASEAN markets’ relative valuations to the region remain at the expensive side

of their historical ranges.

We look to re-engage in 2H14 when political visibility emerges and cyclical

adjustments become mature.

Exhibit 38: The classic EM story remains intact for

ASEAN

Exhibit 39: While the base is low, cyclical adjustments are

needed in Indonesia, and to a lesser extent, Thailand

Note: Excess credit growth is calculate by subtracting the GDP growth (209-2012) from the nominal credit growth (2009-2012)



Exhibit 40: More downward revisions may take place

Exhibit 41: Valuations do not look attractive yet



ASEAN4 AeJ G7

*Capita stock

per worker

(US$)

18,432 49,276 225,191

*GDP per

Capita (US$)5,532 5,956 45,798

Population

below 4071% 62% 53%

Avg worker

wages (Mth,

US$)

372 1061 3494

* The numbers are weighted by GDP.

273%253%

238%

172%152% 145%

130%

96%85%

56%

48%52%

46%

31%

-7%

14%25%

11%8%

42%

-10%

0%

10%

20%

30%

40%

50%

60%

-50%

0%

50%

100%

150%

200%

250%

300%

Ho

ng

Ko

ng

Sin

gap

ore

Ch

ina

Mala

ysia

Ko

rea

Taiw

an

Th

ailan

d

Ind

ia

Ph

ilip

pin

es

Ind

on

esia

Total debt to GDP (%)

Total Debt to GDP (2012)

Excess Credit Growth (09-12, RHS)

Excess Credit Growth (%)

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jan

-03

Ju

l-03

Jan

-04

Ju

l-04

Jan

-05

Ju

l-05

Jan

-06

Ju

l-06

Jan

-07

Ju

l-07

Jan

-08

Ju

l-08

Jan

-09

Ju

l-09

Jan

-10

Ju

l-10

Jan

-11

Ju

l-11

Jan

-12

Ju

l-12

Jan

-13

Ju

l-13

ASEAN Consensus Estimates GDP (yoy)

2004 GDP 2005 GDP 2006 GDP

2007 GDP 2008 GDP 2009 GDP

2010 GDP 2011 GDP 2012 GDP

2013 GDP 2014 GDP

19%

5yr z-score:

0.84

21%

5yr z-score:

0.67

-20%

-10%

0%

10%

20%

30%

40%

Ju

l-06

No

v-0

6

Mar-

07

Ju

l-07

No

v-0

7

Mar-

08

Ju

l-08

No

v-0

8

Mar-

09

Ju

l-09

No

v-0

9

Mar-

10

Ju

l-10

No

v-1

0

Mar-

11

Ju

l-11

No

v-1

1

Mar-

12

Ju

l-12

No

v-1

2

Mar-

13

Ju

l-13

No

v-1

3

Valuation Prem/ Disc (ASEAN vs. MXAPJ)

Fwd PE Prem/ Disc

Trailing PB Prem/ Disc



What will re-rate Chinese banks?

We believe specific policies will be the key re-rating catalysts for Chinese banks in

2014. We see upside risks to the sector as reform momentum gathers pace.

Chinese banks are the fourth largest country-sector in MXAPJ, and are trading at

very low absolute valuations (5.1X 2014E P/E, 0.9X P/B), meaning decisions in this

area will have outsized impact on relative performance.

Chinese banks’ valuations have significantly de-rated relative to their global and

regional peers, and are now implying a 6.1% NPL ratio, versus the 1% reported in 3Q.

These suggest a great deal of banks specific risk is already priced in.

However, we do not think cyclical growth on its own or liquidity improvement

would be enough to re-rate Chinese banks (or prompt outperformance) because they

have become less sensitive to macro factors.

In that vein, we think bank-specific policies including a timetable of interest rate

liberalization (remove overhang), more clarity on preferred share issuance scheme

(improve capital structure), more transparency on accounting and classifying liability

and NPLs (estimate potential loss), and potential measures regarding bad debt

management (NPL carve out, loss absorption, etc.) will be important share price drivers.

Exhibit 42: China banks are the 4th largest country sector

in AeJ, and are trading at very low absolute valuations

Exhibit 43: Current market prices are implying 6.1% NPL

for Chinese banks



Exhibit 44: Chinese banks have de-rated relative to global

peers

Exhibit 45: Chinese banks have become less sensitive to

macro factors



9%

6% 5%4%

4%

3%

3% 2% 2%

1%

13.8 14.0

7.3

5.1

12.012.6

8.9

10.9

18.4

14.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

AU

Ban

ks

TW

Te

ch

KR

Tech

AU

Meta

l

HK

Pro

pe

rty

CN

En

erg

y

CN

Te

lco

s

HK

In

su

ran

ce

IN B

an

ks

MXAPJ Weighting (%) 2014E PE (X)

Ch

ina B

an

ks

6.35.7

6.4

8.4

6.0 5.85.5

6.7

8.2

6.6

5.8

6.7

8.8

6.16.1

5.2

6.05.6 5.85.8

4.8

6.2

5.35.4

0

1

2

3

4

5

6

7

8

9

ICB

C (

H)

BO

C (

H)

CC

B (

H)

AB

C (

H)

Bo

Co

m (

H)

CM

B (

H)

CN

CB

(H

)

Min

sh

en

g (

H)

CQ

RC

B

ICB

C (

A)

BO

C (

A)

CC

B (

A)

AB

C (

A)

Bo

Co

m (

A)

CM

B (

A)

CN

CB

(A

)

Min

sh

en

g (

A)

SP

DB

Ind

ustr

ial

Hu

a X

ia

BO

NB

BO

BJ

BO

NJ

CE

B

Formation covered by general provision Implied new formation

Buy-rated stocks 2013 NPL ratio

Average = 6.1

-29%

5yr z-score:

-1.34

-9%

5yr z-score:

-1.68

-19%

5yr z-score:

-1.00

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Ju

l-0

5

Dec-0

5

Ma

y-0

6

Oct-

06

Ma

r-0

7

Au

g-0

7

Ja

n-0

8

Ju

n-0

8

No

v-0

8

Ap

r-0

9

Se

p-0

9

Fe

b-1

0

Ju

l-1

0

Dec-1

0

Ma

y-1

1

Oct-

11

Ma

r-1

2

Au

g-1

2

Ja

n-1

3

Ju

n-1

3

No

v-1

3

Trailing PB Prem/ Disc (%) CN Banks vs. MXAPJ Banks

CN Banks vs. World Banks

CN Banks vs. EM Banks

-6

-4

-2

0

2

4

6

Sep

-08

Dec-0

8

Mar-

09

Ju

n-0

9

Sep

-09

Dec-0

9

Mar-

10

Ju

n-1

0

Sep

-10

Dec-1

0

Mar-

11

Ju

n-1

1

Sep

-11

Dec-1

1

Mar-

12

Ju

n-1

2

Sep

-12

Dec-1

2

Mar-

13

Ju

n-1

3

Sep

-13

Rolling 3Y t-Stat of CN CAI, FCI on MXCN banks return

CN FCI CN CAI

Insignificant zone (Critical value = +/- 1.96)



China internet and Macau gaming: Buy, hold, or sell?

We recommend buying on any major corrections, China internet in particular.

Macau gaming and China internet (HK- and US-listed) have been the favorite

‘consensus buy’ sectors in the HK/China universe. They boast strong fundamental

investment case; they are liquid; and have performed well enough that many investors

can’t afford to go underweight.

Top-down, we think these two sectors are not yet at the levels where investors

should be too concerned about risks of overshooting, because:

o Their past 3Y returns don’t look stretched relative to historical boom-bust episodes;

o Their performance has been supported by fundamental earnings growth (and

upgrades), which appears healthier than past cases where valuation was a key

return driver.

Bottom-up, while our analysts (and consensus) continue to forecast strong but declining

EPS growth for these two sectors, the growth is mostly contributed by top-line as

opposed to margin expansion (China internet in particular), suggesting that their

optimistic EPS growth forecasts are not aided by stretching their profitability

assumptions.

Exhibit 46: Macau gaming and China internet have been

the two best performing sectors in the past few years

Exhibit 47: Their performance does not look stretched

relative to some historical episodes



Exhibit 48: The rally has been backed by fundamentals

Exhibit 49: EPS growth is not driven by stretching

margins



66%

64%

66%

43%

67%

60%

21%

56%59%

45%

52%55%

62%

51%

61%

51%

40%

20%

30%

40%

50%

60%

70%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

Maca

u (

62

6%

)

CN

In

tern

et

(24

4%

)

HK

Te

lco

s (

82

%)

HK

Dis

c. (5

6%

)

HK

In

du

str

ials

(5

1%

)

CN

Uti

liti

es (

47

%)

HK

Uti

liti

es (

33%

)

HK

Fin

. (1

9%

)

CN

Te

lco

s (

10%

)

CN

Sta

p. (-

1%

)

CN

En

erg

y (

-4%

)

CN

He

alt

hcare

(-1

6%

)

CN

Fin

. (-

18%

)

CN

Dis

c.

(-2

1%

)

CN

In

du

str

ials

(-2

6%

)

CN

Ma

teri

als

(-4

3%

)

HK

I.T

. (-

47%

)

Return since 2010 (%)

Return since 2010

% of buy rating (RHS)

I/B/E/S Consensus Rating (%)

0

100

200

300

400

500

600

700

800

900

T=

0

T=

7

T=

14

T=

21

T=

28

T=

35

T=

42

T=

49

T=

56

T=

63

T=

70

T=

77

T=

84

T=

91

T=

98

T=

105

T=

112

T=

119

T=

126

T=

133

T=

140

T=

147

T=

154

Rebased Performance Index

KR Telcos (TMT)

KR ID (China 03-07)

CN Property

(China 03-07)

CN Materials

(China 03-07)

Macau Gaming

TW I.T. (TMT)

JP Property (1980s)

CH Software

(# of Weeks)

3 years before the peak

63%

472%

603%

475%

630%

244%182%

-19%

294%

84%185% 136%

-18% -13%

82%

178%519% 290%

494%

262%195%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

Ja

pa

n P

rop

ert

y

KR

Te

lco

s +

TW

I.T

.

Ch

ina

Re

al

Esta

te

Ch

ina

Ma

teri

als

Ko

rea

In

du

str

ials

Ma

ca

u G

am

ing

Ch

ina

So

ftw

are

% Chg in country sectors rally (since 3 years before the peak)

Price Chg

Earnings Chg

Valuation Chg

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

20

11

20

12

20

13

E

20

14

E

20

15

E

EPSg NM SPSg

Macau Gaming

20

11

20

12

20

13

E

20

14

E

20

15

E

China Internet



How should investors position in the tech sector?

While we think internet and software (a.k.a new technology) will continue to do

well in 2014, we expect ‘Old tech’ to perform better than in 2013.

Tech is the 2nd largest sector in MXAPJ, accounting for 14.5% of the regional index

weighting of which 54% comes from Samsung and TSMC combined.

Regional tech has performed reasonably well so far in 2013 but with noticeable

divergence: ‘New tech’ has significantly outperformed ‘Old tech’, which primarily

focuses on semi and hardware design and manufacturing.

As noted in several sections in this report, we expect ‘New tech’ to continue to perform

well, backed by secular growth drivers. However, we think ‘Old tech’ will likely have a

better year in absolute return terms, because:

o Valuation has now reached arguably attractive levels in both absolute and

relative terms;

o Our analysts remain fundamentally bullish on Samsung (Buy) and TSMC (Buy,

on Conviction List), the largest and 5th largest stocks in MXAPJ;

o Thematically, ‘Old tech’ appears more favorably skewed towards a DM recovery

story given their revenue exposures there.

Exhibit 50: ‘New tech’ has generated significant alpha for

investors in 2013...

Exhibit 51: ...but ‘Old tech’ still remains important for

absolute returns given its heavy index weighting



Exhibit 52: The valuation gaps between ‘New’ and ‘Old’

are quite substantial

Exhibit 53: ‘Old tech’ seems better positioned for a DM

recovery theme



78%

68% 65%

31%

8% 7%1%

-11% -12%

-40%

-20%

0%

20%

40%

60%

80%

KR

So

ftw

are

CN

So

ftw

are

CN

Se

mi

IN S

oft

ware

MX

AP

J T

ech

TW

Se

mi

KR

Sem

i

TW

Co

mp

. H

/W

KR

Co

mp

. H

/W

Ytd Return (%, USD)

KR Semi

33%

KR Software

4%

KR Comp. H/W

3%

TW Semi

23%

TW Comp. H/W

16%

CN Software

10%

CN Comp. H/W

2%

CN Semi

0%

IN Software

8%

Korea

39%

Taiwan

39%

China

12%

India

8%

Weighting in MXAPJ Tech (%)

22.5

10yr z-score:

0.81

12.1

10yr z-score:

-0.19

8.4

10yr z-score:

-1.055.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Jan

-10

Mar-

10

May

-10

Ju

l-10

Sep

-10

No

v-1

0

Jan

-11

Mar-

11

May

-11

Ju

l-11

Sep

-11

No

v-1

1

Jan

-12

Mar-

12

May

-12

Ju

l-12

Sep

-12

No

v-1

2

Jan

-13

Mar-

13

May

-13

Ju

l-13

Sep

-13

No

v-1

3

Fwd PE (X)MXAPJ Software & Services

MXAPJ Technology H/W

MXAPJ Semi

99% 97%

75%

61%51% 49%

42%

16%

8%

13%22%

38%

21%

53%

9%17% 17%

9%

20%

24%

9% 9% 10%4%

17%8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CN

Software

KR

Software

KR

Comp.

H/W

CN

Comp.

H/W

TW

Comp.

H/W

TW Semi KR Semi IN

Software

Sales exposure as % of totalOthers EU US Asia



Performance context: Intra-regional differentiation at play

Year-to-date, the MXAPJ index essentially posted flat returns, but beneath the headline,

the region had a tough summer followed by a sharp rebound. With excessive volatility

coupled with frequent market rotations, the risk-reward on AEJ equities this year has been

less attractive compared to DM equities or Asian currencies. We highlight various themes

that were in play in 2013 which inform our views and implementation ideas for next year:

A difficult “flat” year with less attractive risk-reward. MXAPJ has essentially

posted flat returns ytd, but beneath the surface the region has witnessed a roller-

coaster ride with four rallies and four pullbacks. Looking over the past 26 years of

history, the ytd returns for MXAPJ are well below historical averages (at 36th

percentile in absolute terms and at 20th percentile relative to DM equities). To

capture the excessive volatility, we compare AEJ with DM equities and currencies

on a risk-adjusted return basis (as measured by returns / realized vol) and note that

DM equities and Asian FX have had much better risk-adjusted returns than AEJ

equities.

Frequent market rotations: country macro in focus. Market leadership

continued to rotate frequently in 2013, continuing the pattern in 2012. Korea fell

almost 15% during 1H13, underperforming MXAPJ, but bounced back 15% in 3Q

posting the best returns in the region. Similarly ASEAN retained its leadership in

1H13 but underperformed in 2H13 on concerns over Fed tapering. Sector

leadership saw relatively less intense rotations. Looking at the dispersion of

returns (as measured by standard deviation) also shows that country dispersion

was higher in 2013.

Currency weakness impacting total equity returns. Most Asian currencies

weakened in 2013 impacting the total returns in dollar terms (particularly for South

Asian markets). For example, currency depreciation subtracted 13% and 17% from

India and Indonesia, respectively, in US dollar total return terms and 5% return

from the overall region. We have previously noted that FX changes make up on

average 25% of short and longer-term total returns and expect currency to play an

important role next year as well.

Better stock picking opportunities. Average stock correlations, which had risen

during the May-June sell-off, have reduced meaningfully suggesting more

opportunities for bottom-up stock picking.

Several intra-regional themes at play. The excessive volatility coupled with

frequent market rotations made navigating the investment environment tougher

this year. But several intra-regional trends were still at play, as summarized below:

o North Asia outperformed ASEAN. We argued at the beginning of the

year that ASEAN would underperform the region in 2013 after 7 years of

consistent outperformance. Although ASEAN continued to do well early in

the year, it came under intense pressure during the summer. The North

Asian markets also rallied strongly post summer and outperformed South

Asia (India, ASEAN) by 23% from their July low.

o Thematic alpha opportunities. Notwithstanding frequent rotation,

several macro themes, as embodied in our “macro slice” framework,

priced consistently in 2013. Global Cyclicals consistently outperformed

given tailwinds of improving DM growth and weaker Asian currencies.

Asset Sensitive Financials and Commodity Cyclicals remained under

pressure given headwinds of Fed tapering and slowing China growth.



Exhibit 54: DM equities have had much better risk-adjusted returns than MXAPJ in 2013

Source: Bloomberg, FactSet, MSCI, Goldman Sachs Global Investment Research

Exhibit 55: Most Asian currencies have also had better risk-adjusted returns than AEJ equities

Source: Bloomberg, FactSet, MSCI, Goldman Sachs Global Investment Research

Exhibit 56: Stock correlations have reduced, suggesting

“alpha” opportunities

Exhibit 57: Correlation of market returns is still quite

negative, indicating frequent rotation



Price returns Realized vol

2013 Ytd %tile vs. Vol-adj returns %tile vs. returns 26-yr history (Returns / vol) 26-yr history

S&P 500 ($) SPX 26.1% 76% 10.0 2.61 96%

Topix (¥) TPX 44.4% 96% 23.3 1.91 84%

Stoxx Europe 600 (£) SXXP 15.5% 60% 11.5 1.35 64%

MSCI Asia-Pac ex-Japan ($) MXAPJ 2.5% 36% 12.6 0.20 36%

MSCI Emerging Market ($) MXEF -3.0% 40% 13.1 -0.23 40%

MXAPJ vs. MSCI Dev. World ($) MXAPJ / MXWO -15.6% 20% 11.0 -1.42 4%

Risk-adjusted returns

Equities Ticker 2013 Ytd rlzd vol (%)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

IDR

Australia

INR

JPY

AUD

PHP

Malaysia

MYR

TWD

THB

SGD

Philippines

Taiwan

Hong Kong

India

Singapore

China

EUR

Thailand

KRW

MXAPJ

HKD

Korea

Indonesia

Equities FX3.6

Absolute Risk-adjusted returns

(Returns / realized vol, YTD)

20%

30%

40%

50%

60%

70%

80%

No

v-0

8

May

-09

No

v-0

9

May

-10

No

v-1

0

May

-11

No

v-1

1

May

-12

No

v-1

2

May

-13

No

v-1

3

Avg Stock Correlation

(3-mo correlation with MXAPJ)"Macro"

Trading

"Micro"

Trading

-0.50

-0.25

0.00

0.25

0.50

Ma

y-9

6

Ma

r-9

7

Ja

n-9

8

No

v-9

8

Se

p-9

9

Ju

l-00

Ma

y-0

1

Ma

r-0

2

Ja

n-0

3

No

v-0

3

Se

p-0

4

Ju

l-05

Ma

y-0

6

Ma

r-0

7

Ja

n-0

8

No

v-0

8

Se

p-0

9

Ju

l-10

Ma

y-1

1

Ma

r-1

2

Ja

n-1

3

No

v-1

3

Correlation This month's return vs. last month's return

(across Asian markets, 12-mo avg)

Relative to the past 17 years, 2012 and 2013 are years of extreme rotation



Exhibit 58: Market rotation has been more intense than sector rotation


Exhibit 59: Markets have varied more than sectors,

indicating country macro was more in focus

Exhibit 60: Currency weakness has had a significant

impact on MXAPJ market returns in USD terms



Exhibit 61: North Asian markets have outperformed

South Asia

Exhibit 62: Global Cyclicals have outperformed Asset

sensitive financials

Source: FactSet, MSCI

Source: Bloomberg, Goldman Sachs Global Investment Research

Quarterly Market Rotation (US$ Returns)

1Q13 2Q13 3Q13 4Qtd

Australia 8% Taiwan 2% Korea 15% India 7%ASEAN 6% ASEAN -5% China 11% China 6%

HK 3% HK -6% Australia 10% Korea 4%Taiwan 0% India -6% HK 8% Australia 4%India -3% China -9% Taiwan 1% ASEAN 3%

Korea -4% Korea -10% India -6% HK 3%China -5% Australia -15% ASEAN -6% Taiwan 1%

Outperform

In-Line

Underperform

Quarterly Sector Rotation (US$ returns)

1Q13 2Q13 3Q13 4Qtd

Healthcare 7% Telcos. 1% Materials 13% Cons. Disc. 6%Utilities 6% Info. Tech. -4% Cons. Disc. 10% Info. Tech. 5%

Financials 6% Cons. Disc. -4% Industrials 9% Healthcare 5%

Cons. Stap. 4% Healthcare -6% Info. Tech. 7% Materials 5%

Info. Tech. 1% Cons. Stap. -7% Energy 7% Financials 5%

Cons. Disc. 0% Utilities -8% Financials 5% Energy 4%

Industrials -1% Industrials -9% Healthcare 3% Cons. Stap. 3%

Telcos. -2% Financials -10% Cons. Stap. 2% Industrials 2%

Energy -4% Energy -14% Telcos. 1% Utilities 1%Materials -9% Materials -15% Utilities 1% Telcos. -1%

Outperform

In-Line

Underperform

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

Mar-

06

Ju

l-0

6

No

v-0

6

Mar-

07

Ju

l-0

7

No

v-0

7

Mar-

08

Ju

l-0

8

No

v-0

8

Mar-

09

Ju

l-0

9

No

v-0

9

Mar-

10

Ju

l-1

0

No

v-1

0

Mar-

11

Ju

l-1

1

No

v-1

1

Mar-

12

Ju

l-1

2

No

v-1

2

Mar-

13

Ju

l-1

3

No

v-1

3

in Local currency in USD

Higher COUNTRYdispersion

Higher SECTORdispersion

Country LESS Sector Dispersion(Rolling 3-mo return basis)

%YTD returns

(Local)YTD returns

(US$)

Australia 17% Hong Kong 8%

Philippines 11% Australia 5%

Malaysia 8% Philippines 4%

Hong Kong 8% Korea 3%

MXAPJ 7% Malaysia 3%

India 5% Taiwan 3%

Taiwan 4% China 3%

Singapore 3% MXAPJ 2%

China 3% Singapore 1%

Korea 2% Thailand -4%

Thailand -1% India -8%

Indonesia -2% Indonesia -19%

85

90

95

100

105

110

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

May

-13

Ju

n-1

3

Ju

l-1

3

Au

g-1

3

Sep

-13

Oct-

13

No

v-1

3

MXAPJ

(local, +7% ytd)

MXAPJ

(US$, +2% ytd)

85

90

95

100

105

110

115

Jan‐13

Feb‐13

Mar‐13

Apr‐13

May‐13

Jun‐13

Jul‐13

Aug‐13

Sep‐13

Oct‐13

Nov‐13

North Asia vs.South Asia (Relative performance, indexed)

North Asia = China, Korea and Taiwan ; South Asia = India and ASEAN

+23%

-9%

90

92

94

96

98

100

102

104

106

108

110

De

c-1

2

Jan

-13

Feb

-13

Ma

r-1

3

Ap

r-13

Ma

y-1

3

Ju

n-1

3

Ju

l-1

3

Au

g-1

3

Se

p-1

3

Oct-

13

No

v-1

3

Global Cyclicals vs. Asset Sensitive Financials

(Relative performance, indexed)

GSSZMSGC / GSSZMSFA



Macro: Return expectations, views, and path

Bottom-line: Roughly 10% fundamental-driven returns, event-

dependent path and trading strategies

Our 2014 macro forecasts for Asia: Growth to improve moderately (6.1% to 6.4%),

inflation to stay in check (3.4% to 3.9%), policy to tighten marginally (+40bps on

average across AeJ), and Asian FX to weaken vs. the USD (-3% weighted by GDP).

The key growth delta is the macro recovery in DM, and its reinforcing impact on

domestic demand in Asia.

Top-down returns expectation: Close to 10% fundamental upside for MXAPJ

(slightly different from our official forecast); likely range between 470 and 580, +/-

10% from our end-14 MXAPJ target of 525.

An eventful policy and political year: QE tapering in the US (March 2014), growth

rebalancing and reform in China, potential further easing in Japan (April 2014),

and important elections in Europe and South Asia in mid-2014.

An event-dependent path and intra-year allocation, specifically:

1. Start the year with a positive tilt to China on a favorable yoy growth trend

and liquidity combo and potential carry-through of positive reform

momentum from 4Q13, and stay conservative on ASEAN due mainly to the

looming tapering concerns;

2. Look to accumulate Korea, especially on weakness, around the BoJ

meeting in April to trade a better external demand picture in 2H14 and 2015;

3. Watch for buying opportunities for Indonesia, and possibly India around

summer when political visibility emerges and cyclical adjustments mature

there;

4. Turn aggressive on broad market beta in 2H14, notably our three earnings-

related ideas, for a potential acceleration in earnings growth in 2015.

Baseline views for 2014: Growth to improve moderately, inflation to

stay in check, and policy to tighten marginally

Our economists expect the overall growth picture for AEJ to improve next year,

from 6.1% in 2013 to 6.4%, in line with current consensus;

The driver of growth would be a meaningful recovery in external demand, and

the resulting positive spillover to domestic private consumption growth. The

external demand recovery will be led by the US (2.9% in 2014), which may operate

close to trend growth, and the Euro area, which may return to expansion (+1.1%)

after staying in recession for two consecutive years (-0.6% for 2012 and -0.4% for

2013);

Inflation is likely to edge higher to 3.9% for 2014, from 3.4% in 2013 as output

gaps close;

Liquidity normalization may continue given our expected QE tapering in the US,

and forecasted policy rate hikes across Asian economies;

Except for SGD and PHP, our economists see Asian FX generally trading weaker

against the USD as the US begins to normalize its policy in 2014.

Details of our economists’ forecast on growth, inflation, rates, and FX are shown in

Appendix 1.



Exhibit 63: The growth and inflation configuration for

AEJ is likely to be similar to 2013

Exhibit 64: Our economists expect a moderate pickup in

growth, in line with consensus expectation



Exhibit 65: Growth contribution will likely come from net

exports and the ripple effects on local consumption

Exhibit 66: Liquidity conditions may normalize in Asia,

partly driven by QE tapering in the US

Note: The forecasted paths are calculated based on our interest rate forecasts



Translating our macro expectations into equity returns

Approach 1: Top-down regression model points to 8% upside for the region.

While we fully acknowledge the drawbacks of basing our views on regression

models, it helps distill the macro-to-market transmission mechanisms and locate a

reasonable range of where fair value may lie relative to macro fundamentals, in

our view.

Specifically, we employ two models—level and yoy return for MXAPJ—to estimate

fundamental upside for the region. Our models, which incorporate GDP growth,

inflation, financial conditions (US and Asia), and nominal earnings in Asia, show

8% potential upside for the MXAPJ index in 2014 (USD), based on our end-14

forecasts on these variables.

2003

2004

2005

2006

2007

2008

2009

2010

2011

20122013E

2014E

5

6

7

8

9

10

11

0 1 2 3 4 5 6 7

An

nu

al

real

GD

P (

yo

y)

Annual CPI (yoy)

YearGS Consensus GS Consensus

Dec-03 6.4% 7.3% 6.5% 90 bp 10 bp

Dec-04 8.2% 6.8% 6.8% -140 bp -140 bp

Dec-05 7.7% 7.6% 7.1% -10 bp -60 bp

Dec-06 8.7% 8.2% 7.6% -50 bp -110 bp

Dec-07 9.5% 8.5% 8.8% -100 bp -70 bp

Dec-08 7.0% 5.5% 6.3% -150 bp -70 bp

Dec-09 5.7% 8.7% 7.6% 300 bp 190 bp

Dec-10 9.1% 8.4% 7.8% -70 bp -130 bp

Dec-11 7.4% 7.1% 7.2% -30 bp -20 bp

Dec-12 6.2% 6.9% 6.6% 70 bp 40 bp

Dec-13 6.1% 6.4% 6.4% 30 bp 30 bp

Change in GDP growth

expectationsGS Current year

expected GDP

(yoy)

Next year GDP growth

(yoy)

Asia ex-Japan

2.5 2.6 2.8 2.9 2.6 2.7

1.01.7

0.8 0.91.0

1.2

0.6 0.4

0.4

0.4

2.6 2.5

3.9 3.4

1.4 1.4

0.4

1.0

0.3 0.4

0.0 0.2

0.20.7

1.0

0.7

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

AeJ China South Asia North Asia

Real GDP (yoy) Net Exports

Total Fixed Investment

Public consumption

Private Consumption

99 (1% yoy)

102 (0.7% yoy)

96

98

100

102

Ja

n-0

9

Ju

n-0

9

No

v-0

9

Ap

r-1

0

Sep

-10

Fe

b-1

1

Ju

l-11

Dec-1

1

May-

12

Oct-

12

Mar-

13

Au

g-1

3

Ja

n-1

4

Ju

n-1

4

No

v-1

4

FCI Ex-Equity (Yr 1999 = 100)US FCI AeJ FCI

Financial tightening

Financial loosening



Approach 2: Earnings growth/valuation sensitivity suggests the fair value of

MXAPJ may range from 470 to 580.

We complement our top-down return forecasts with bottom-up earnings and

valuation analysis.

A combination of our 14/15 EPS growth forecast of 10%/14% and a target forward

P/E multiple of 12.0X in Dec 2014 suggests MXAPJ should trade at 525 by end-14,

10% upside from current levels.

To account for forecasting errors (EPS growth) and potential valuation over-/under-

shoots (+/- 0.5 standard deviation), we believe the reasonable fair-value range for

MXAPJ should be bounded between 470 and 580, about 10% downside/upside

from our base-case return. This is admittedly a wide range but not an implausible

one given the volatility that we have seen so far this year.

Exhibit 67: Our top-down model for MXAPJ suggests around 8% for the regional market

Source: FactSet, MSCI, Bloomberg

Exhibit 68: A combination of our EPS growth forecast and target P/E multiple suggests a reasonable range of 470 to

580

Source: FactSet, MSCI, Bloomberg

514

0

100

200

300

400

500

600

Dec-9

5

Dec-9

6

Dec-9

7

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

MXAPJ Index Level

MXAPJ

Fitted line

Dependent Variable = MXAPJ price level

Format Variables Coefficients t-Stat Assumption

Level Intercept -59 -4.8 -

yoy Regional GDP 1866 12.5 6.4%

yoy Regional CPI 837 4.2 3.9%

yoy Regional FCI -3293 -8.1 0.7%

level nominal tEPS 11 29.5 10.0%

R^2 89%

2014 expected annual return 8%

Format Variables Coefficients t-Stat Assumptions

Level Intercept -0.6 -12.9 -

yoy Regional GDP 10.2 16.5 6.4%

yoy Regional CPI 0.9 1.2 3.9%

yoypp UST10Y 11.7 7.6 0.5%

yoy Regional FCI -8.6 -5.9 0.7%

R^2 75%

2014 expected annual return 7%

7%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Dec-9

5

Dec-9

6

Dec-9

7

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

MXAPJ (USD, yoy)

MXAPJ

Fitted line

Dependent Variable = MXAPJ yoy return

Avg. 2014 expected annual return = 8%

Estimate - 5% Estimate + 5%

-2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5%

10.8 417 427 438 449 459 470 481 491 502 513 523

11.0 426 437 448 459 470 481 492 503 514 525 536

Target - 0.5SD 11.3 436 447 458 470 481 492 503 514 525 537 548

11.5 446 457 469 480 491 503 514 526 537 549 560

11.8 455 467 479 490 502 514 525 537 549 560 572

12.0 465 477 489 501 513 525 537 549 560 572 584

12.3 475 487 499 511 523 536 548 560 572 584 596

12.5 484 497 509 522 534 547 559 571 584 596 609

Target + 0.5SD 12.8 494 507 519 532 545 557 570 583 596 608 621

13.0 504 517 530 543 556 568 581 594 607 620 633

13.3 514 527 540 553 566 579 593 606 619 632 645

2014 EPS Growth (%)

Targ

et

Fo

rward

PE

Mu

ltip

le (

X)

GS 2014E

EPS Growth

2014 year-end target

Fwd PE multiple



Framing views and path around macro and political events

We anticipate an eventful year in terms of macro, political, and policy developments

globally: QE tapering in the world’s largest economy, growth rebalancing and reform in

the 2nd largest (China), a potential increase of QE in the 3rd largest (Japan), and important

elections in select parts of Europe and Asia where the results may have significant

implications to the rest of their regions, and even to the global markets.

In this vein, while our macro forecasts, which drive our equity return forecast for Asia,

reflect our best estimate of how fundamentals may evolve over the course of 2014, these

event uncertainties imply the variance around our base case would likely be high.

Additionally, the rapid advancement and adoption of technology, globalization, and

high equity valuations (average) will likely further complicate the reaction functions

in the equity market than would normally be implied by simple historical analysis.

Below, we overlay our fundamental return expectations with our view on the

aforementioned macro and political events, aiming to form a guide as to how and when

the market may trade these events, and calibrate our intra-year market allocations and

strategies accordingly.

Exhibit 69: Our hypothetical path of return: A slow start, followed by a strong finish


1) QE tapering in March 2014: A less dramatic response than in summer 2013

Our expectations: The Fed to begin tapering in March 2014 (from US$85bn/month

to US$75bn), and exit QE by the end of 2014. However, its strong commitment to

forward guidance should keep financial conditions at very accommodative levels,

especially at the front-end of the yield curve. Our economists expect the 10Y UST

to rise to 3.25% by end-14.

Non-linear and specific impact to Asian equities: Equities that are favorably

exposed to improving global demand but less affected by rising rates (interest cost,

valuation, FX, and property), and vice versa. By markets and sectors, they include

Korea, autos, and select financials on the long side, and Australia, Philippines, HK,

utilities, telecoms, and property on the short side (Exhibit 70).

470

480

490

500

510

520

530

De

c-1

3

Ja

n-1

4

Fe

b-1

4

Mar-

14

Ap

r-14

May-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Sep

-14

Oct-

14

No

v-1

4

De

c-1

4

MXAPJ Index

Mar 2014

1)US QE Tapering

2)China policy

momentum carries

over 1Q

Apr 2014

BOJ Monetary

Policy Meeting

(Potential stimulus

announcement)

2H2014

2015E EPS growth

accelerates

2014E MXAPJ

return +10%

May-July 2014

Indonesia, India, UK,

Spain, Portugal,

Greece Election

1Q14 2Q14 3Q14



How will the market react when the Fed tapers in March? We believe the

reaction will be less dramatic than in summer 2013 when MXAPJ plunged 16%

from peak to trough, given: a) the meaningful macro and asset market adjustments

that have been made in several CA deficit economies; b) US rates are less

undervalued from a term-premium standpoint and relative to our Sudoku model,

and; c) market participants are arguably better prepared, mentally and in terms of

positioning. That said, we still believe the expectation of QE tapering will keep

Asia, notably South Asia, under pressure until this overhang is removed.

Exhibit 70: QE tapering framework: We think the impact on Asian equities would be non-linear and specific


Exhibit 71: We expect current accounts in South Asia to

improve in 2014

Exhibit 72: US rates are currently more in line with

fundamentals



Exhibit 73: Asian financial assets appear less vulnerable to the QE/liquidity shocks than they were in May


Improving growth and

rising interest rate

Higher Interest rate

AU/ TH;

Utilities/

Transport.

Utilities/

TelecomsPhilippines

Multinational

banks and

regional insurers

PropertyForeign

Exchange

Growth recovery

(Better demand

outlook)

Korea,

Taiwan

Autos/

Industrials

Cost of

funding

Yield

compression

Valuation

compression

Yield curve

shift/

steepening

Exporters Cyclicals

Potentially

stronger

USD

Real asset

valuation

Hong Kong/

Regional

property

Asian

exporters

to the US

Companies

reporting in

USD/ CA deficit

Potential

Beneficiaries

Potential

Losers

16.5

1.0 1.5 1.7

3.0

8.3

-5.1

-3.1

-1.4

0.82.0

-4.4 -4.0-3.9

-2.9-2.2

-4.9

-3.1 -3.8-2.9

3.84

2.49

2.61

2.75

3.25

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

-6

-3

0

3

6

9

12

15

18

2009 2013-2Q 2013E-3Q 2013E-4Q 2014E

Current Account Deficit (As % of GDP)

Malaysia Thailand

Indonesia India

UST10Y (RHS)

UST10Y Yield

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

(%)+/- 1 std dev. US 10-yr yield

Sudoku 'Fair' Value Current Market Pricing

Old GS forecast

5%

-1%-1%-4%-5%-5%

-7%

-13%-16%-17%

-28%

-4%

10%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Ko

rea

Ch

ina

Ho

ng

Ko

ng

Ta

iwa

n

Au

str

ali

a

Ma

lay

sia

Sin

ga

po

re

Ind

ia

Th

ail

an

d

Ph

ilip

pin

es

Ind

on

esia

MX

AP

J

SP

X

Chg in equities since May peak (USD, %)

3%

1%0%

0%-2%

-6%-6% -6%

-8%

-13%

-15%

-4%

-16%

-12%

-8%

-4%

0%

4%

KR

W

CN

Y

HK

D

TW

D

SG

D

PH

P

TH

B

MY

R

AU

D

INR

IDR

DX

Y

Chg in FX since May peak (%)

239

121

75 7150 46 43 41 39 34

-56

58

-100

-50

0

50

100

150

200

250

300

Ind

on

esia

Ind

ia

Au

str

alia

Ch

ina

Th

ail

an

d

Ko

rea

Ho

ng

Ko

ng

Sin

gap

ore

Taiw

an

Mala

ysia

Ph

ilip

pin

es

US

Chg in bond yield Since May Peak (bps)



2) China: 1H is likely a better trading environment

A reasonably favorable growth + liquidity combo in 1H14; reform momentum may

continue. Besides improving reform momentum, which is the key argument for our

upgrade on China, we suggest starting the year with a positive tilt to China because:

Growth: Our economists project yoy GDP growth momentum to be strong in 1H14,

mainly on a favorable base effect, but the sequential trend could be weak due to

inventory destocking. Overall, this seems to provide a conducive environment for

equity returns in 1H as we note that the market tends to trade yoy growth rather

than sequential growth (Exhibit 75).

Liquidity: Liquidity conditions tend to be more accommodative early in the year.

As last June’s interbank rate spike and ensuing market sell-off demonstrated,

China’s asset markets are sensitive to liquidity conditions, especially given the

increase in corporate leverage in recent years.

Exhibit 74: China’s yoy and sequential growth

momentum is likely to diverge in 1H14

Exhibit 75: Equity markets tend to trade yoy growth

more than sequential growth momentum

Period of analysis: Since 2007, monthly frequency. The calculation is done with a 1-month lag to take into account the reporting lag of China econ data.



Exhibit 76: Liquidity conditions have tended to be more

favorable in the early part of the year in China

Exhibit 77: Reform may bode well for the economy, but

the fundamental impact on the equity market is likely to

be mixed



7.3

7.4

7.5

7.6

7.7

7.8

7.9

8

8.1

8.2

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

20

12

-1Q

20

12

-2Q

20

12

-3Q

20

12

-4Q

20

13

-1Q

20

13

-2Q

20

13

-3Q

20

13

E-4

Q

20

14

E-1

Q

20

14

E-2

Q

20

14

E-3

Q

20

14

E-4

Q

China GDP (qoq. Ann.)

GDP (qoq. Ann.) GDP (yoy, RHS)

China GDP (%)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

AP

J

Ch

ina

HK

Ind

ia

Ind

on

esia

Ko

rea

Mala

ysia

Ph

ilip

pin

es

Sin

ga

po

re

Taiw

an

Th

ail

an

d

Au

str

ali

a

yoy +, seq +

yoy +, seq -

yoy -, seq +

yoy -, seq -

308.8

-129.0

403.1

98.6

-2.5

117.4

-269.7

-60.5

12.9

-307.1

-162.3

-36.5

-400

-300

-200

-100

0

100

200

300

400

500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average difference in NSA. TSF and SA. TSF since 2002 (RMBbn)

Better liquidity conditions in 1Q

17% 17%

13% 9%

16%16%

25%40%

28%18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Market cap weighted 2013E earnings

weighted

Impact of Policy Reforms on MXCN Sectors (%)

Others

Negative (Banks)

Negative

Neutral

Positive



3) Abenomics: Limited impact on AEJ’s fundamentals, more manageable headwinds to Korea this time around

Abe’s first arrow set to be loosed again. Our economists expect the BoJ to step

up its monetary easing effort to offset the negative impacts of the consumption tax

hike in April and to boost inflation which is far short of its 2% target. They believe

the monetary policy easing is likely to be the most important driver for USD/JPY

(JPY to weaken), and continue to expect USDJPY to rise to 107 in 12 months.

Muted fundamental impact on AEJ so far. At the macro level, the relationships

between Japan’s FCI and AEJ’s have been weak, suggesting limited

financial/liquidity spillover to the region from Abenomics so far (Exhibit 79).

In terms of real activity, Korean exports (nominal and relative to Japan’s exports),

which have been widely regarded as the major loser when JPY depreciates, have

posted record numbers in the latest October print, supporting our strong and long-

held view that Korean exports’ FX sensitivity is much lower than investors have

generally perceived.

Potential headwinds to Korea in March/April, but more manageable than in

1H13. However, investors’ perception/concern remains entrenched: Korea

underperformed MXAPJ by 8pp in 1H13 when USDJPY and TPX rallied 16% and

28%. Looking ahead to the April BoJ meeting, we believe Korea will be less

impacted, mainly because:

a) the extent to which the JPY may depreciate should be much smaller than

when Abenomics was first announced; and,

b) investors should be less concerned about Korea’s deteriorating FX

competitiveness by then given the resilient export performance since

September 2012.

We would take any JPY-created market weakness as a buying opportunity to

position for global growth acceleration in the next two years.

Exhibit 78: Our economists expect the BoJ to announce further easing measures in April

Source: FactSet, Goldman Sachs Global Investment Research.

Jan 1 NISA initiation

Mid Jan. Ordinary Diet Session begins (FY2014 budget, FY2013 supplementary budget bills deliberation)

Late Jan. - Feb. Earnings results for 3Q13/14

Jan. 21-22 Jan. 21-22 BOJ Monetary Policy Meeting (Interim assessment on the BOJ outlook report)

Feb. 22-23 G20 Finance minister & central bank governors meeting (Sydney)

Feb-Mar Annual spring wage negotiation

End Mar FY2014 budget established

Apr 1 Consumption tax rate hike from 5% to 8%

Apr 30

BOJ Monetary Policy Meeting (Outlook Report) - Our Econ team expected that BOJ will

remain under pressure to provide additional easing to mitigate the impact of the tax hike. If

economic conditions deteriorate versus BOJ’s current scenario, our econ team believes BOJ

will make additional easing moves by purchasing ETFs and other risking assets.

May 20-21 BOJ Monetary Policy Meeting

Jun 4-5 G8 Summit Meeting (Russia)

Jun 12-13 BOJ Monetary Policy Meeting

During Jun Public works from the October 2013 economic package starts to kick in

Mid Nov 2014 Q3 GDP (Important for final devision of 2nd consumption tax rate hike, from Oct 2015)

Key Events in 2014



Exhibit 79: Japan’s financial conditions do not seem to

have significant spillover impact on AEJ

Exhibit 80: Korea’s exports do not seem severely

impacted by a weakening JPY



Exhibit 81: Korea has traded more negatively than what

history would suggest when JPY depreciates

Exhibit 82: We expect JPY to weaken further, but the

magnitude should be moderate



4) Elections in South Asia and Europe

While we do not take a view on the outcome of these elections, we believe they may be

market-moving events with fundamental implications in some cases, and investors should

monitor developments for better risk management and more effective tactical trading.

In this vein, we have compiled a detailed timetable of policies and events that may

have significant implications for Asia in the Appendix.

We believe these events include the parliamentary and presidential elections in India and

Indonesia, and a number of parliamentary elections in the peripheral European economies

which may have spillover effects to specific areas (e.g. Europe-exposed stocks) and even to

the global markets.

89

91

93

95

97

99

101

103

105

107

Ja

n-0

5

Ju

n-0

5

No

v-0

5

Ap

r-0

6

Sep

-06

Fe

b-0

7

Ju

l-07

De

c-0

7

May-0

8

Oct-

08

Mar-

09

Au

g-0

9

Ja

n-1

0

Ju

n-1

0

No

v-1

0

Ap

r-1

1

Sep

-11

Fe

b-1

2

Ju

l-12

De

c-1

2

May-1

3

Oct-

13

Financial Condition Index (Yr 2005 = 100)

Japan Korea Regional FCI

Financial tightening

Financial loosening

148

11.3

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.590

100

110

120

130

140

150

May-0

9

Au

g-0

9

No

v-0

9

Fe

b-1

0

May-1

0

Au

g-1

0

No

v-1

0

Fe

b-1

1

May-1

1

Au

g-1

1

No

v-1

1

Fe

b-1

2

May-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3

May-1

3

Au

g-1

3

Rebased Index

Relative export Index (KR vs JP)

KRW/JPY (RHS)

JPY/KRW (Reverse)

18% 17% 17% 16% 15% 15% 14% 14% 13%

9%

4%

17%

21%

12%

17%

-15%

7%

-7%

23%

-16%

4%6%

9%

1%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Ch

ina

Ind

ia

Ho

ng

Ko

ng

Ko

rea

Mala

ysia

Sin

ga

po

re

Ph

ilip

pin

es

Au

str

alia

Ind

on

esia

Ta

iwa

n

Th

ail

an

d

MX

AP

J

Market Return Correlation with USDJPY10 Year

Since Sep 2012

65

70

75

80

85

90

95

100

105

Jan

-12

Ju

n-1

2

No

v-1

2

Ap

r-13

Sep

-13

Feb

-14

Ju

l-14

De

c-1

4

Rebased Currency Index

JPYUSD JPYKRW



Earnings: Back to trend growth in 2015 after 4 years of weakness

We see limited room for further multiple expansion given current valuation levels.

Therefore, equity returns next year will have to be primarily driven by earnings. We expect

earnings growth to accelerate back to trend in 2015 after 4 years of sub-trend growth.

Our top-down regional earnings growth forecasts are 10% and 14% for 2014 and 2015.

Demand-side models have overestimated earnings recently because the shortfall has come

from margins rather than revenues. Weak capacity utilization and excess capacity have

depressed profitability. Looking forward, capex discipline and moderating input cost

pressures should result in non-financial margins improving 50bp to 7% in 2015 after a

20bp uptick in 2014.

We outline our logic below.

Revenue growth should stay steady; the wild card is margins

Revenue growth has generally followed the path of nominal GDP growth. In our view, the

region will be able to deliver roughly 7% revenue growth in the next two years given our

assumption of gradually improving economic growth.

The wild card is margins. During 2011 and 2012, a sharp margin decline offset positive

revenue growth, leading to flat earnings for two consecutive years. Margins have now

troughed, but the magnitude of improvement has been minimal, with merely 20bp

potential expansion this year. What has driven the weakness in margins? We believe there

are two major reasons.

Costs have outgrown revenues

Operating costs have outgrown revenues, leading to a sharp drop in margins.

Commodity prices rose 50% from mid-2010 to mid-2011. Brent price, for example,

went from a low of US$70/barrel to a high of US$125. We expect a gradual decline

in commodity prices over the next few years given supply debottlenecking.

Wages have grown rapidly. In China, CAGR has been 10% in real terms over the

past 5 years. Although it is likely that labor wages will continue to go up, we

believe the pressure is at least not intensifying.

With this outlook in mind, Asian firms are likely to see some relief in cost pressure in our

view. However, we do not see a significant uplift to profit margins until 2015 as we believe

the degree of operating leverage will remain dampened next year due to overcapacity.

Overinvestment in capex has led to low capacity utilization and hurt margins

Overcapacity in Asia has not been driven by weaker demand alone. We believe aggressive

supply addition (i.e. capex) has played an important role. To illustrate why it is important

to consider supply dynamics, we update our top-down earnings model, which takes into

account three core macro variables – domestic demand, exports, and inflation. This

approach, which is largely demand based, significantly over-estimated actual

earnings growth in 2011-2012 and 2005-2007, even with perfect foresight forecasts on

the macro variables. During these two periods, we saw a significant drop in capacity

utilization, and net margins pulled back offsetting revenue growth.

We make the following points on capex and capacity utilization.

Capex intensity in Asia over the past few years is back on the rise, in both

capex/sales and capex/depreciation terms. Capex growth has slowed, but not

enough relative to the magnitude of demand slowdown.



This has led to weak capacity utilization, which forms a sharp contrast with

the US. Revenue growth in both regions dropped, but Asian margins fell very

sharply while those in the US held up, similar to its utilization rate.

Heavy capex of the past years is also draining cash away. As of 2012, capex

alone took up 100% of operating cash flow generated by Asian firms, who had to

draw on their cash reserves and raise debt to finance other operations. As a result,

leverage increased noticeably.

In our view, Asia is unlikely to be able to afford more capex with internal

funding. In fact, we observe that capex intensity has started to decline.

We expect to see better supply discipline, and stronger margin expansion, as

we move into 2015. Margins have historically troughed roughly 1-2 years after

capex peaked. In our view, a sharp drop in capex intensity in 2013 could lead to a

meaningful margin pickup in 2015. From a bottom-up perspective, we also study

the potential changes in supply growth by sector; the result indicates that although

some sectors may see a reduction in excess capacity next year, most are smaller in

index weights (China steel/cement, China solar, regional bulkers, etc.). The broad-

based improvement should be more visible as we move into 2015.

Below-trend EPS growth in 2014; stronger margin expansion to fuel

growth acceleration in 2015

Based on the above, we assume a modest 20bp margin expansion in 2014. Together with

high-single digit revenue growth assumption, we believe profit growth will remain

moderate, and we maintain our 10% MXAPJ EPS growth forecast. As we move into 2015,

margins will likely improve by a larger magnitude of 50bp, and this should fuel EPS growth

acceleration back to trend at 14% after 4 years of weakness.

This compares to 12% and 10% EPS growth consensus expectations.

By market, our forecasts are meaningfully different vs consensus. For 2014 estimates, we

are most below consensus for Korea and Thailand. Despite our expectation of negative

revisions, we still expect Korea’s earnings growth will still be the highest in Asia. We are

slightly above consensus for the Philippines, and roughly in line with consensus for China,

Taiwan, Singapore and Malaysia.

Risks to our forecasts

As much as we discuss the supply-side dynamics, the demand side of the earnings

equation is also important, and it heavily depends on the macro outlook.

We expect the banks and insurance sectors to contribute one-fifth of the 10% earnings

growth we forecast for the region next year. Earnings in these sectors generally have a

strong relationship with the macro environment. Our high single digit to mid-teens %

growth forecasts for most sectors are driven by the view of steadily accelerating Asia GDP

growth and an eventual rise in interest rates.

Of note, the growth improvement we expect is fairly dependent on the improvement of

external demand (as we highlighted in the macro section). For this reason, the pace of US

and Europe macro recovery will be a critical risk factor to our earnings growth forecasts.



Exhibit 83: We expect Asian earnings to return to trend growth in 2015, after 4 years of

weakness Earnings growth time series


Exhibit 84: We maintain our 10% EPS growth forecast for 2014; our expectation for 2015 is

14%, 4pp above current consensus GS top-down and consensus earnings growth forecasts by market


Exhibit 85: We expect 2014 earnings growth to be driven by a broad range of sectors

2014 earnings growth contribution by sector, based on our estimates

Source: FactSet, I/B/E/S, MSCI.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

199

4

199

7

200

0

200

3

200

6

200

9

201

2

20

15

E

MXAPJ EPS growth (local currency)

+59% +49%+184%

-17% -36%-52%

-47%

Average:

14%

GS top-down Consensus

Markets 2014E 2015E 2014 2015

Australia 8% 11% 11% 8%

China 10% 11% 10% 10%

Hong Kong 6% 9% 9% 11%

India 12% 18% 14% 15%

Indonesia 12% 17% 16% 15%

Korea 15% 15% 20% 11%

Malaysia 8% 10% 9% 9%

Philippines 8% 16% 6% 14%

Singapore 8% 14% 9% 10%

Taiwan 11% 13% 12% 9%

Thailand 9% 11% 14% 12%

MXAPJ 10% 14% 12% 10%

0%

2%

4%

6%

8%

10%

Ban

ks/i

ns.

Cap

. g

oo

ds

Mate

rials

Reta

il

Au

tos

Oth

ers

En

erg

y

Sem

i

Uti

liti

es

Pro

pe

rty

Sta

ple

s

Ha

rdw

are

Inte

rnet/

IT s

vcs

Healt

h c

are

Oth

er

fin

.

Tele

co

ms

Tra

nsp

ort

MX

AP

J

2014 EPS growth contribution



Exhibit 86: We assume roughly 7% sales growth in the

next 2 years MXAPJ sales growth time series

Exhibit 87: Margin improvement in 2014 should remain

modest, but we expect strong margin expansion to fuel

acceleration of earnings growth in 2015 MXAPJ net margin time series

Exhibit 88: Both cost of goods sold and SG&A as % of

sales have sharply increased again during 2011-2012,

contributing to a drop in net margin Cost structure of MXAPJ companies

Exhibit 89: A simple demand-based model has not been

able to explain the earnings disappointment over the

past few years Actual vs. fitted of our top-down (demand-based) EPS model

Exhibit 90: Low capacity utilization has dampened

margin recovery over the past few years... Capacity utilization of Asia ex Japan and US

Exhibit 91: ... as Asia has over-invested in capacity

relative to the moderation in sales growth, in our view Revenue vs. Net PP&E growth in APJ and US

Source: FactSet, Haver, I/B/E/S, MSCI, Goldman Sachs Global Investment Research.

6%

8%

10%

12%

14%

16%

18%

-5%

0%

5%

10%

15%

20%

25%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013P

2014E

2015E

MXAPJ sales growth (actual and GS forecasts)

Including financials

Excluding financials

Nominal GDP growth

8.4%8.6%8.8%

9.3%

6.1%6.3%6.5%

7.0%

4%

5%

6%

7%

8%

9%

10%

11%

12%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

201

3P

201

4E

201

5E

MXAPJ net margin (actual and GS forecasts)

Including financials

Excluding financials

70%

75%

80%

85%

90%

95%

100%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Cost breakdown

Net margin

Taxes & othersInterestOther opex

SG&A

COGS

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%1994

1997

2000

2003

2006

2009

2012

Actual

EPS growth

Fitted EPS growth

from top-down model

Significant over-estimation

by our top-down model

60

65

70

75

80

85

May-8

8

May-9

0

May-9

2

May-9

4

May-9

6

May-9

8

May-0

0

May-0

2

May-0

4

May-0

6

May-0

8

May-1

0

May-1

2

Capacity utilization

Asia Pacific ex Japan

US

0%

2%

4%

6%

8%

10%

12%

14%

16%

-5%

0%

5%

10%

15%

20%

25%

30%

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

3-year CAGR for both, APJ

Revenue

Net PP&E (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

3-year CAGR for both, US

Revenue

Net PP&E

(RHS)



Exhibit 92: Capex intensity in Asia has sharply risen Capex/sales and capex/depreciation ratios, global comparison (ex-financials, energy, utilities)

Exhibit 93: Capex spending alone is now taking up 100%

of the operating cash flow generated by Asian companiesCapex as % of operating cash flow, global comparison (ex-

financials, energy, utilities)

Exhibit 94: Firms are rapidly drawing their cash reserves

to finance their other cash usages Cash balance ratio, global comparison (ex-financials, energy,

utilities)

Source: FactSet, MSCI.

Exhibit 95: Capex intensity is starting to reduce as companies cannot afford more capex

with their internal cash, but margin has historically troughed roughly 1-2 years after capex

peak; a sharp drop in capex intensity in 2013 suggests a meaningful margin pickup in 2015 Capex intensity (reversed) vs. net margin

Source: FactSet, MSCI.

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Capex/sales

APJ

US

Europe

Japan

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Capex/depreciation

APJ

US

Europe

Japan

20%

40%

60%

80%

100%

120%

140%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

Capex as % of OCF

US

Europe

Japan

APJ

6%

7%

8%

9%

10%

11%

12%

13%

14%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Cash balance as % of total asset

US

Europe

Japan

APJ

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Capex/depreciation (X) Net margin (%)

2y

Same

1y

2y1y

Same

?Capex/dep(reversed)

Net margin



Exhibit 96: Our study on sector supply suggests that most sectors in Asia will still have supply expansion in 2014; we

may see more broad-based improvement in supply discipline in 2015

Note: margin change is with respect to the past 5 years. Net debt/equity ratio is as of 2013. Potential change in capacity is for 2014. Black shading is applied to sharp margin contraction over the past 5 years, high net debt/equity and potential reduction in capacity. Blue shading is applied to sharp margin expansion over the past 5 years, low net debt/equity and potential expansion in capacity.

Source: FactSet, industry sources, Goldman Sachs Global Investment Research.

Exhibit 97: The top 5 sectors contribute about 80% of earnings in each market


Margin change

(pp) (%)

Hong Kong 1.0% 8.2 n.m. 10% →Korea 0.5% 0.2 7% 37% →China 0.4% (0.9) -13% -11% →Australia 0.3% 9.9 n.m. 35% →Australia 2.2% 1.0 25% 30% →China 0.7% (0.3) -6% 6%

Korea 0.6% (3.6) -37% 30% →India 0.5% 3.5 30% 9%

India 0.9% (0.1) -1% -44% →China 0.5% (11.6) -30% -44%

Korea 0.3% 17.6 n.m. -21%

Taiwan 2.5% (0.5) -15% -2%

Korea 0.4% (0.5) -11% 16%

Korea 8.7% 6.5 n.m. -31% →Taiwan 2.8% 4.8 33% -6%

China 2.1% (1.6) -10% -23%

Singapore 0.5% (2.7) -12% 30%

Australia 0.4% 0.1 0% 98%

Taiwan 0.4% (4.6) -22% -1%

Hong Kong 0.8% (12.9) -39% 41%

China 0.6% 9.3 851% 164%

Potential

chg in

capacity

Telecom services 4%

Retail / gaming 3%

Consumer staples

and Health Care5%

Utilities 3%

Software and

services2%

Computer

hardware3%

Semiconductors 12%

Net

D/E

ratio

Sector

2014

Erns

wgt

Top

markets

2014

Erns

wgt

Margin change

(pp) (%)

China 3.5% (1.8) -21% 37%

Australia 1.2% (14.4) -64% 38%

India 0.9% (7.8) -55% 16%

Thailand 0.6% 2.0 67% 39%

Korea 0.5% 1.0 83% 33%

Korea 0.8% (0.3) -11% 69%

Taiwan 0.5% 3.3 78% 18%

China 0.5% (1.7) -18% 192%

Australia 0.4% 2.0 60% 72% →Metals & mining 4% Australia 3.5% 5.3 38% 41%

Korea 0.8% (5.8) -65% 62%

Australia 0.5% 43.5 -183% 84% →India 0.2% (2.8) -41% 140%

Taiwan 0.1% (2.1) -35% 79% →China 0.0% (2.0) -177% 182%

Korea 1.7% (0.3) -15% 72% →China

Sing

Australia 0.4% (4.0) -43% 76% Cont.

China 0.3% 4.7 219% 76% Bulk.

Korea 3.9% 2.4 151% 23%

China 0.6% 5.4 111% -15%

India 0.4% (1.0) -14% 12%

Potential

chg in

capacity

29%

Building materials 1%

Steel, aluminium 2%

(1.6) -38%Shipbuilding

Transportation 1%

Autos 5%

5%

Oil and gas 7%

Upstream

Refining

Chemicals 2%

Singapore 0.7%

Net

D/E

ratio

Sector

2014

Erns

wgt

Top

markets

2014

Erns

wgt

Banks

Banks

Property

Banks

Banks

Semi

Banks

Industrials

Banks

Semi

Banks

Mining

Energy

Ins.

Energy

Autos

Autos

Utilities

Banks

Industrials

Computer HW

Energy

Staples

Telco

Durables

Tech

Telco

Banks

Staples

Telco

Property

Banks

Chem.

Ins.

Prop.

Utilities

Staples

Staples

Ind.

Ind.

Property

Telco

Ins.

Building Mat.

Property

Insurance

Industrials

Autos

Building Mat.

Chemicals

Telco

Utilities

Staples

Chemicals

Telco

0% 20% 40% 60% 80% 100%

Australia

China

Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Earnings weight of top 5 sectors (2014E)



Valuations: Not much room for expansion except for China

As we have noted, Asia’s headline valuations may look undemanding (at 12.1X forward

P/E), but the region doesn’t look particularly attractive as average stock valuations are 31%

higher (at 15.9x) and expensive relative to history. Overall, we would argue the current

valuations for Asia are at best fair relative to the macro backdrop, except for China where

we expect multiples to recover from a low base as confidence in reforms builds. We

expect the aggregate region to trade at 12.0X forward P/E at the end of 2014, a slight de-

rating from current elevated levels. We summarize our key arguments below:

Headline regional valuations are undemanding relative to its history. MXAPJ

is currently trading at 12.1X forward 12m earnings and 1.6x trailing book, which

are 0.3 and 1.0 standard deviation below their ten year averages, respectively.

Even looking at individual markets, cap-weighted valuations for most markets

except Philippines and Malaysia are trading near or below their 10 year averages.

But average stock valuations look expensive. As we have noted previously, the

region doesn’t look particularly attractive on equal-weighted (average) valuations.

The average stock valuation for MXAPJ is 31% higher at 15.9, which is 0.8

standard deviations on the expensive side of its 10-year history.

While the valuation gap between headline and average does exist in other

regions, the effect is more pronounced in Asia. The valuation divergence

between market-cap weighted and average valuations is largely due to

inexpensive but large sectors in Asia, such as China banks and Korean exporters,

which are increasingly weighing down aggregate (i.e. market cap weighted)

valuations. Indeed, looking within individual markets we note that China & Korea’s

cap weighted valuations are approximately 30% below their equal weighted

valuations. While valuation gaps do exist in other regions, we note that the effect

is more pronounced in Asia than in other parts of the region (Exhibit 101).

Macro fundamentals suggest valuations are at best fair for headline but

expensive on an average basis. Our macro-models based on global and

domestic growth, long-term rates and inflation indicate that the region could trade

at 11.5x forward earnings on a market-cap weighted basis, which is at best fair

compared to current valuations. The average valuations however look expensive

relative to the macro backdrop as the average stock model is more sensitive to

growth and valuations have expanded despite slowing growth expectations.

Most markets look fair relative to the current liquidity backdrop, but a rise in

bond yields could cause valuations to come under pressure. Based on the yield

gap (difference between earnings yield and real short rates) analysis, we find that

most Asian markets look fairly priced relative to their ranges. However, a rise in

bond yields could potentially cause valuations to come under pressure.

Empirical evidence also suggests flat returns at current average valuation

entry points. As we have noted (see AsiaPac Valuations: What works, and when,

Mar 12, 2012), the starting point of valuations plays a vital role in determining

subsequent returns. From the current expensive levels of average stock P/E, the

region’s subsequent returns have historically been almost flat.

We see limited room for further re-rating except for China. While the valuation

changes hinge upon both domestic and global growth changes, we note that the

recent re-rating in Asia was largely because of global factors as evident in recent

re-rating in equities globally. We expect MXAPJ to trade at 12.0X forward P/E at

the end of 2014, a slight de-rating from current elevated levels. China is the

exception, where we expect multiples to recover from a low base as confidence in

reform builds.



Exhibit 98: MXAPJ headline valuations look

undemanding compared to historical averages...

Exhibit 99: ...but average stock valuations look expensive

Exhibit 100: The average stock valuations are 30% higher

than the cap-weighted headline valuations in the region

Exhibit 101: The valuation gaps between headline and

average P/E are higher in Asia than in US and EU

Exhibit 102: Our model suggests that the current

headline valuations are fair, based on our macro

expectations...

Exhibit 103: Yield gap analysis shows most Asian

markets look fairly valued relative to the liquidity

backdrop


Valuation vs. 10-Year History

Current 10-year Z-scoreP/E P/B P/E P/B Avg.

(NTM) (LTM) (NTM) (LTM) Z-ScoreChina 9.3 1.5 -0.9 -1.1 -1.0Korea 8.8 1.2 -0.5 -1.2 -0.8Hong Kong 15.0 1.3 -0.4 -0.8 -0.6India 14.4 2.5 -0.2 -1.1 -0.6Singapore 14.1 1.5 0.1 -1.0 -0.4Taiwan 14.1 1.8 0.1 -0.5 -0.2Indonesia 13.3 3.1 0.5 -0.7 -0.1Australia 14.5 2.0 0.7 -0.4 0.1Thailand 11.9 2.2 1.0 0.1 0.5Malaysia 15.5 2.2 1.1 0.3 0.7Philippines 18.5 3.1 1.8 1.3 1.5

MXAPJ 12.1 1.6 -0.3 -1.0 -0.7

15.9

10yr z-score:- 0.8

12.1

10yr z-score:- -0.3

8x

10x

12x

14x

16x

18x

20x

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

Market Cap-weighted P/E

MXAPJ 12-mo forward P/E (X)

Equal-weighted P/E

China 13.5x 8.8x 53%

Korea 13.0x 8.6x 51%

Thailand 15.7x 11.8x 33%

Australia 18.6x 14.5x 28%

Taiwan 17.7x 14.1x 26%

India 17.5x 14.0x 25%

Singapore 16.4x 13.9x 18%

Malaysia 17.7x 15.5x 14%

Indonesia 14.5x 13.2x 10%

Hong Kong 15.8x 14.7x 7%

Philippines 19.0x 18.4x 4%

MXAPJ 15.9x 12.1x 31%

12-mo forward P/E (X)

Market

Equal-

weighted

Market Cap-

weightedDifference

31%

22%

17%

13%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

No

v-0

2

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

Fwd PE premium between index headline Fwd PE and equal-

weighted Fwd PE

MXAPJ SPX

STOXX TPX

6x

8x

10x

12x

14x

16x

18x

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

MXAPJ Actual 12-mo forward P/E

MXAPJ Fitted 12-mo forward P/E

R-sq = 72%

11.5X

(5)

-

5

10

15

20

Au

str

ali

a

Ch

ina

Ho

ng

Ko

ng

Ind

on

esia

Ind

ia

Ko

rea

Ma

lay

sia

Ph

ilip

pin

es

Sin

ga

po

re

Ta

iwa

n

Th

ail

an

d

Yield gap (Earnings yield - real short rates, %) Average Current level

+/- 1 Std.dev. High/low

more extended valuations relative to

the liquidity environment

more attractive valuations relative to

the liquidity environment



Exhibit 104: Average stock valuations look expensive relative to the macro backdrop

Source: DataStream, FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research

Exhibit 105: Asia’s valuations have risen largely due to

the re-rating of global equities

Exhibit 106: Empirical evidence indicates almost flat

returns at current average valuation entry levels



6x

8x

10x

12x

14x

16x

18x

20xD

ec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

MX

AP

J e

qu

al-

we

igh

ted

fo

rwa

rd P

/E

Fitted Actual

Downgrades to Asian GDP

growth estimates but average stock valuations

re-rated on global factors

-11%-6%

1%-5%

-25%

36%

-12% -13%

13% 14%

2%

11% 11% 13%

-5%

-2%

-6%

3%

-13%

12.112.8

14.3

15.5

10.8

14.5

12.8

10.3

11.912.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Re-/de-rating due to Asia's

specific factors

Changes in global equities'

valuations

MXAPJ forward P/E (X)

Fwd PE (X)Re-de-rating (%) Starting Avg. P/E and Forward Return

When MXAPJ % of Average Returns

Avg. PE is... (X) obs 1-mo 3-mo 6-mo 1-yr

Less than 9.5 1 % 5 % (3)% 33 % 81 %

9.5 to 11.0 5 3 % 15 % 25 % 45 %

11.0 to 12.5 16 0 % 3 % 10 % 23 %

12.5 to 14.0 25 0 % (0)% 2 % 8 %

14.0 to 15.5 28 0 % (0)% (3)% (2)%

15.5 to 17.0 14 0 % (0)% (0)% (5)%

17.0 to 18.5 8 2 % 5 % 7 % (1)%

18.5 to 20.0 3 0 % 7 % 7 % (7)%

Greater than 20.0 1 (0)% (4)% (8)% (31)%



Positioning: Potential for continuing shift to North Asia

Foreign flows have recovered after a tough summer, with flows primarily favoring North

Asia. Allocation data still shows investable gaps, and more aggressive allocations to North

Asia could amplify returns, in our view. We continue to expect flows to rotate out of bonds

to equities, which could be supportive for overall equities in 2014. We summarize our key

points below:

Foreign flows have recovered post summer as risk appetite picked up. After

net outflows of US$16bn since their respective May peak (for the Asian markets

that report exchange-level net foreign activity), the region has seen inflows of

US$23bn since September with net inflows of US$28bn year-to-date. The recovery

in foreign flows has coincided with the 10% rebound in MXAPJ from its August

lows as regional risk appetite picked up after the tough summer.

Flows have primarily favored North Asia. The North Asian markets have

received the lion’s share of recent foreign inflows. Since August lows, Korea and

Taiwan have seen cumulative net foreign buying of almost US$20bn (Korea:

US$12.5bn, Taiwan: US$7.4bn). The recent foreign buying is partly reflective of the

higher sensitivity of these markets to a better external environment with less

exposure to the risk of US monetary policy normalization, in our view.

Active funds still have strong underweights in North Asia; we see potential

for more inflows. While many investors argue that recent flows and performance

indicate that long North Asia is already a “consensus trade”, we note that

allocation data still shows investable gaps in North Asia. Based on allocation data

from EPFR, both GEM and Asia-focussed mutual funds remain underweight North

Asia by a significant margin. For example, mutual funds with Asia mandates still

have strong underweights in Korea (-769bp) and Taiwan (-649bp) while holding

strong overweights in India (+495bp) and ASEAN (+948bp). Given allocation gaps

and our view that North Asian markets offer the clearest way to gain exposure to

improving global growth, we see potential for more inflows to North Asia.

Active managers have performed in line with the region despite a strong

start; more aggressive allocations to North Asia could amplify returns. Asia-

Pacific focused mutual funds had a strong start to the year, outperforming MXAPJ

by 5pp in the first two quarters of the year. But the post summer rebound has seen

active funds underperforming MXAPJ with the year-to-date tracking in line vs.

region. The underperformance since 3Q may partly be attributed to the fact that

North Asian markets outperformed South Asian markets and the relative

allocations to North Asian markets are still low. More aggressive allocations to

North Asia in 2014 could help amplify performance, in our view.

‘Meta level’ flow / positioning dynamics remain constructive for equities. As

per ICI flow data, bond funds are on pace for their first year of net outflows since

2004. Excluding the ETFs, active bond funds have already seen US$30bn net

outflows post the Fed’s taper debate in June. We continue to anticipate investor

flows to rotate from bond to equities in 2014. Also comparing investor positions

in equity and debt markets, we continue to believe that investor positions are less

extended in equity markets (relative to debt markets). Foreign positioning risk still

looks relatively higher in local currency debt markets given a significant rise in

foreign ownership levels post the GFC and the relatively lower liquidity of bond

markets.



Exhibit 107: Net foreign buying in EM Asia

Exhibit 108: Foreign flows have been favoring North Asia

Source: Bloomberg

Source: Bloomberg

Exhibit 109: After net outflows of US$ 16bn during summer, the region has seen net inflows of US$ 24bn

Source: Bloomberg

Exhibit 110: Active funds are still underweight North

Asian markets and overweight South Asia

Exhibit 111: AEJ-focused MFs have performed in line

with MXAPJ ytd

Top 50 AEJ benchmarked funds covering US$10 bn of assets

Source: EPFR, FactSet, MSCI

Source: Bloomberg, FactSet

18 20

1

3630 33

18

-2

-70

61 65

-14

51

28

(80.00)

(60.00)

(40.00)

(20.00)

-

20.00

40.00

60.00

80.00

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

YT

D

Annual foreign buy of EM Asia cash equities

USD bn

-$4

$1

$6

$11

$16

$21

$26

$31

$36

Ja

n-1

2

Fe

b-1

2

Mar-

12

Ap

r-1

2

May-1

2

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

No

v-1

2

Dec-1

2

Ja

n-1

3

Fe

b-1

3

Mar-

13

Ap

r-1

3

May-1

3

Ju

n-1

3

Ju

l-13

Au

g-1

3

Sep

-13

Oct-

13

No

v-1

3

North Asia

South Asia

Cumulative FII net buying ($ bn)

FII flows: How much "came out" during May-June sell-off and subsequently recovered?

Inflows to May 22 Outflows till July 8

Since 2013 Prior % of last % of 2013 % of 2013 YTDbeginning 3 Months $ mn 3-mo flows flows till May $ mn outflows net flows

India 14,723 6,465 -1,017 16% 7% 5,039 495% 16,677

Korea -4,338 -4,140 -4,237 n/a n/a 12,471 294% 6,453

Taiwan 5,078 3,177 -5,686 179% 112% 7,438 131% 8,341

Thailand -146 -24 -2,550 n/a n/a 127 5% -3,656

Indonesia 2,665 1,075 -2,921 272% 110% -277 n/a -1,058

Philippines 1,601 762 -74 10% 5% -354 n/a 935

Emerging Asia 19,584 7,314 -16,486 225% 84% 24,444 148% 27,692

Inflows since Aug 28

-1600

-1200

-800

-400

0

400

800

1200

Oct-

03

Ap

r-0

4

Oct-

04

Ap

r-0

5

Oct-

05

Ap

r-0

6

Oct-

06

Ap

r-0

7

Oct-

07

Ap

r-0

8

Oct-

08

Ap

r-0

9

Oct-

09

Ap

r-1

0

Oct-

10

Ap

r-1

1

Oct-

11

Ap

r-1

2

Oct-

12

Ap

r-1

3

Oct-

13

ASEAN India Hong Kong China North Asia (Korea, Taiwan)

Asia-fund

OW/UW (bps)

96

98

100

102

104

106

108

110

De

c-0

9

Mar-

10

Ju

n-1

0

Se

p-1

0

De

c-1

0

Mar-

11

Ju

n-1

1

Se

p-1

1

De

c-1

1

Mar-

12

Ju

n-1

2

Se

p-1

2

De

c-1

2

Mar-

13

Ju

n-1

3

Se

p-1

3

De

c-1

3Asia ex-Japan Avg. Mutual Fund Performance

Avg. MF return vs. MXAPJ (Indexed)

YTD: in-line with MXAPJ;

Strong start to the year but underperformed since 3Q



Exhibit 112: We continue to anticipate flows to shift from

bonds to equities

Exhibit 113: We see less extended positions in most

equity markets (except India)

Source: ICI, AMG, Lipper US Fund Flows

Source: Bloomberg

Exhibit 114: Foreign ownership of Asian equities has

steadily risen...

Exhibit 115: ...while foreign ownership of bonds has risen

significantly post GFC

Source: Bloomberg,, local stock exchanges

Source: CEIC, AsianBondsOnline

Exhibit 116: Positioning risk still looks higher in bonds, given a significant rise in ownership and relatively lower

liquidity

Source: Bloomberg, CEIC, Stock exchanges, AsiaBondsOnline

0

50

100

150

200

250

300

350

-60

-40

-20

0

20

40

60

80

Ja

n-1

1

Mar-

11

Ma

y-1

1

Ju

l-1

1

Sep

-11

No

v-1

1

Ja

n-1

2

Mar-

12

Ma

y-1

2

Ju

l-1

2

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

Ma

y-1

3

Ju

l-1

3

Sep

-13

No

v-1

3

Equity Funds Bond Funds (RHS)

US$ bn US$ bnCumulative net buying (ex ETF) since 2011

-$2

$0

$2

$4

$6

$8

$10

$12

-$5

$5

$15

$25

$35

$45

Ja

n-1

2

Mar-

12

May-1

2

Ju

l-1

2

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

May-1

3

Ju

l-1

3

Sep

-13

No

v-1

3

India

ASEAN(rhs)

Cumulative FII net buying ($ bn)

10

15

20

25

30

35

40

45

Oct-

01

Ap

r-02

Oct-

02

Ap

r-03

Oct-

03

Ap

r-04

Oct-

04

Ap

r-05

Oct-

05

Ap

r-06

Oct-

06

Ap

r-07

Oct-

07

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Equity Foreign ownership (%)

Korea

Taiwan

India (FII, Quarterly)

Thailand

Philippines

31.0

17.9

31.2

9.8

77.1

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

40M

ar-

96

Ja

n-9

7

No

v-9

7

Sep

-98

Ju

l-99

May-0

0

Mar-

01

Ja

n-0

2

No

v-0

2

Sep

-03

Ju

l-04

May-0

5

Mar-

06

Ja

n-0

7

No

v-0

7

Sep

-08

Ju

l-09

May-1

0

Mar-

11

Ja

n-1

2

No

v-1

2

Sep

-13

MY TH ID KR AU (rhs)

Foreign ownership of Asian local govt. bonds

Cumulative

FII flows

Avg daily

value traded

# Days

trading in

case of a

Current

foreign

Foreign

ownership

Avg daily

value traded

# Days

trading in

case of a

since 2010 (US$ mn) full unwind ownership in 2010 (US$ mn) full unwind

India 70,024 2,495 28.1 507 47.4

Philippines 6,036 246 24.5 - - 320 -

Indonesia 5,951 617 9.6 31.2 18.6 79 164.1

Korea 32,498 5,488 5.9 9.8 7.0 2,406 6.5

Taiwan 13,925 3,162 4.4 - - 7,786 -

Thailand 1,235 1,560 0.8 17.9 3.2 796 42.8

Malaysia - 570 - 31.0 13.3 459 73.2

Australia - 4,829 - 77.1 62.0 700 60.4

Note: Local govt. bonds ownership and liquidity estimates do not include corporate or foreign currency bonds

Equities Local government bonds

Market

Cum. FII buying of $ 24 bn



Secular themes: Buy on dips

As we highlighted in our outlook piece last year, we see certain global and Asia-specific

macro trends that are rapidly changing our daily lives, as well as reshaping the investment

landscape and offering potentially rewarding returns when they are available at reasonable

valuations.

Broadly, we group them under three main categories in Asia: Digitalization of

consumption, urbanization, and green GDP.

They all share some common characteristics:

They boast a clear investment case of delivering strong secular topline growth;

Importantly, they aren’t just investment themes under the broad Asia growth

story— they are (and have become) influential building blocks of that story;

Stocks which are favorably exposed to these themes tend to trade at high

valuation multiples. Our strategy is to ensure we understand the logic and driver

of growth, identify potential winners in these areas through a micro lens, and

await opportunities to accumulate these stocks when market corrections come

or attractive entry levels emerge.

We highlight stocks which may benefit from these themes, complemented by our

analysts’ bottom-up industry positioning and micro fundamental analysis in

Exhibit 117.

Exhibit 117: Buy on dips: Any major weakness would present strategically sound opportunity to accumulate these

potential long-term winners, in our view

*Denotes stock is on our regional Conviction List.


Bloomberg Name Country Sector

Listed Mkt

Cap (US$

mn)

6M ADVT

(US$ mn)

Price

(Quote)Curncy

GS

Rating

12m

Potential

+/(-)%

2013E

EPSg

(%)

2014E

EPSg

(%)

2014E

P/E

(X)

2014E

P/B

(X)

2014E

D/Y

(%)

EM smartphone demand

005930 KP Samsung Electronics Korea Semi 196,418 320 1424000 KRW B 26% 35% 13% 6.9 1.4 1.0%

2330 TT TSMC Taiwan Semi 90,793 117 103.50 TWD B* 26% 11% 16% 12.5 2.7 2.9%

2454 TT Mediatek Taiwan Semi 18,741 82 410.50 TWD NR - 53% 29% 15.8 2.7 3.8%

Potential disruptive technology - Array camera

2382 HK Sunny Optical China Computer H/W 958 10 6.77 HKD B 40% 17% 57% 10.5 2.1 2.1%

Big Data & Cloud computing

2308 TT Delta Electronics Taiwan Computer H/W 11,759 23 143 TWD B 17% -3% 27% 15.6 3.3 4.0%

Internet commercialization

700 HK Tencent China Internet 98,526 179 411 HKD B* 10% 26% 38% 24.5 7.7 0.5%

BIDU UW Baidu China Internet 43,436 516 159 USD N 1% 9% 26% 24.0 6.5 0.0%

Infrastructure - Railroad

601006 CG Daqin Railway China Transportation 17,692 32 7.25 CNY B 23% 10% 15% 7.4 1.3 8.1%

601299 CG China CNR China Industrials 9,181 40 5.42 CNY B* 14% 12% 27% 11.6 1.4 2.6%

Infrastructure - Construction

LT IS Larsen & Toubro India Industrials 13,753 46 939 INR B* 2% -1% 9% 15.9 2.1 1.2%

Urbanization - Staples and healthcare

KLBF IJ PT Kalbe Farma Indonesia Healthcare 5,719 9 1300 IDR B 18% 18% 30% 23.0 6.2 2.2%

1099 HK Sinopharm China Healthcare 2,647 13 20.65 HKD N 11% 8% 20% 19.3 2.2 1.6%

867 HK China Medical System China Healthcare 2,096 4 6.73 HKD B* 26% 25% 25% 15.7 3.5 2.5%

Green Energy

600900 CG China Yangtze Power China Utilities 17,090 19 6.31 CNY B 35% -5% 1% 10.4 1.2 5.3%

1193 HK China Resources Gas China Utilities 5,751 10 20.05 HKD B* 22% 14% 23% 17.5 2.9 1.4%

958 HK Huaneng Renewables China Utilities 1,447 8 3.21 HKD B -7% 93% 55% 16.3 1.9 1.4%

Port. Avg. 20% 26% 15.4 3.1 2.5%

APJ Avg. 8% 18% 15.6 2.7 2.9%



Digitalization of consumption

We remain structurally positive on the growth potential for the rising penetration,

broadening usage, and further commercialization of internet/mobile technology.

Our main argument is that we believe the virtuous cycle of amalgamating

consumption and technology remains intact. Specifically, significant capex in

mobile communication infrastructure (4G/LTE) is likely to increase penetration for

mobile devices, which incentivizes investment in new technology and hardware

components. That will subsequently drive demand for mobile applications and

(big) data. Data allows corporates to analyze consumer behavior more accurately

and target customers in a more efficient and scalable manner, thereby innovating

new online business models and offline business strategies.

Among many sub-themes that look promising, including 3D printing, LED, internet

gaming and media, and battery technology, we think liquid investment

opportunities in Asia are clustered around the following areas:

o EM smartphone demand: Samsung Electronics, Mediatek and TSMC

o New and potential disruptive technology – Array camera: Sunny Optical

o Big data and cloud computing: Delta

o Internet commercialization: Tencent and Baidu

Exhibit 118: The virtuous cycle of consumption

digitization

Exhibit 119: Infrastructure of mobile communication is

likely to see strong growth in 2014

Exhibit 120: EM smartphone demand has risen strongly

Exhibit 121: Rising demand for smartphones has

incentivized innovation and new technology

Source: IDC, Goldman Sachs Global Investment Research.

Infrastructure capex

Mobile devices

Software and components

Big Data/Cloud computing

Consumption digitalization

Boost

demand

Incentivize

investment

Efficient

customer

strategy

Drive data

traffic

Stimulate further

investment

5

54

85

101 104

101

90

-

20

40

60

80

100

120

2012 2013E 2014E 2015E 2016E 2017E 2018E

Total 4G LTE Capex in China (Rmb bn)

89 110 183 249 296 337 364 38051 63

116

223

384

721

955

1,172

0

200

400

600

800

1,000

1,200

1,400

1,600

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

20

15E

Global Handset Sales Volumn (mn)

EM Smartphones

DM Smartphones

0% 0%

1%

3%

6%

9%

0%

4%

8%

12%

16%

20%

0

50

100

150

200

250

300

350

400

450

2012 2013E 2014E 2015E 2016E 2017E

(mn units) Total array camera shipment and penetration rate

(main and front-facing camera)

Total array camera shipment (LHS)

Array camera penetration rate (RHS)



Exhibit 122: A wider usage of mobile communication has

led to more demand for data traffic, storage, and

analysis...

Exhibit 123: ...which opens up business opportunities and

creates new business models

Source: IDC

Source: Euromonitor

Urbanization + Infrastructure in EM Asia

A favorable base effect has been one of the key arguments for investing in Asia

as it implies growth potential here could be high if the appropriate institutional

setup is in place.

The two inter-related supply-side factors—urbanization and infrastructure—

largely determine to what extent EM Asia may realize its growth potential, in our

view.

Clearly, these two themes have been well broadcasted, but we believe investors

may not have fully grasped the direct implications and ripple effects they might

have on aggregate demand.

For infrastructure, while there have been hiccups and disappointments due to

political, safety, funding, and specific implementation issues, we believe it remains

one of the most promising growth stories in EM Asia, particularly if investors

get their bottom-up picks right, because: a) infrastructure quality in EM Asia,

notably in ASEAN and India, is far below global standards; and, b) governments

understand the lack of infrastructure investment will suppress growth and trigger

inflation. Indeed, we continue to see strong infrastructure investment growth in

China and select parts of South Asia.

Urbanization will become more or less a natural economic development if

good infrastructure is in place as the latter should help facilitate labor and capital

movements, and raise productivity.

Importantly, this is conducive to middle-income class formation across EM Asia,

which will drive demand for consumer staples and healthcare as income grows.

Related areas which offer liquid and compelling bottom-up stories include:

o Railroad: CNR and Daqin Railway

o Infrastructure: Larsen & Toubro

o Staples and healthcare, mass market consumption: CMS, Sinopharm,

and Kalbe Pharma

0

200

400

600

800

1000

1200

1400

2010 2011 2012 2013E 2014E 2015E

Global wireline and mobile broadband traffic volume (Annual, in exabytes)

0

50

100

150

200

250

300

350

0

100

200

300

400

500

600

700

800

900

1,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

2013

E

2014

E

2015

E

2016

E

Size of internet retailing

World

Asia Pacific

World (US$bn) Asia Pacific (US$bn)



Exhibit 124: The base effect still looks favorable in EM

Asia

Exhibit 125: Urbanization continues to be a powerful

trend


Source: World Bank

Exhibit 126: Urbanization requires the support of better

infrastructure

Exhibit 127: Strong infrastructure investment growth is

likely to continue

Source: World Bank

Source: Local Government Data, Goldman Sachs Global Investment Research

Exhibit 128: The rise of middle-income class will create

significant demand for consumer goods and services in

EM

Exhibit 129: Healthcare-related services remain one of the

most compelling themes in Asia, in our view


Source: World Bank, Ministry of Health, Taiwan, Goldman Sachs Global Investment Research.

167,119

133,695

45,718

28,691 24,431 15,414

8,428 5,976

80,016

225,191

-

50,000

100,000

150,000

200,000

250,000

Taiw

an

Ko

rea

Mala

ysia

Th

ailan

d

Ch

ina

Ind

on

esia

Ph

ilip

pin

es

Ind

ia

Asia

G7

Capital stock per urban worker (US$)

83%

74%71%

53% 52%49%

34%32%

61%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Ko

rea

Mala

ysia

Taiw

an

Ch

ina

Ind

on

esia

Ph

ilip

pin

es

Th

ailan

d

Ind

ia

Asia

G7

Urbanization rate (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Ko

rea

Taiw

an

Mala

ysia

Ch

ina

Ind

ia

Ind

on

esia

Th

ail

an

d

Ph

ilip

pin

es

Infrastructure Quality IndexRailroads Ports

Air Transport Electricity Supply

US$bn

(2013-2020)CN IN PH TH ID MY

Transport 2,188 345 36 51 104 20

Power 2,184 380 5 16 53 11

Water 291 142 8 - 4 2

I.T. & Comm. 259 177 1 1 23 -

Social Infra. 973 - 12 4 - 11

Total 5,895 1,044 62 72 183 45

% of Next 5yr

GDP10% 8% 3% 3% 3% 2%

1,876

3,638

50916

498

299

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 Brazil Russia India China G7 RoW 2030

Global Middle Class Population (mn)

Net Changes8608

5939

4065 3609

16161322 1121

807 346 278 202 97 95 59

17%

9%

9%9%

7%7%

10%

6%

3%4%

4% 4%3%

4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

US

Au

str

ali

a

Ja

pa

n

UK

Ko

rea

Ta

iwan

Bra

zil

Ru

ssia

Mala

ysia

Ch

ina

Th

ail

an

d

Ph

ilip

pin

es

Ind

on

esia

Ind

ia

Per Capita Expenditure on Health (2011)

Total Expenditure on Health as % of GDP (2011)

(RHS)

(USD)



Green GDP (in China)

We believe the theme of environmental protection has gradually evolved from

an investment idea that syncs well with national policy to a crucial driver of

sustainable, high quality growth for China going forward.

Simply, the strong growth in China over the past 30 years has partly come at the

expense of inefficient use of natural resources, and the side effects are clear: Area

of arable land, air quality, and clean-water available per capita have noticeably

deteriorated in the past five years (Exhibit 130).

Generally, two options are available: (a) lower growth and consumption of

resources, which is not likely to be a wise policy choice when growth is

challenged; or (b) grow in a more environmentally friendly and/or more efficient

manner, which makes more political and economic sense. This puts alternative

energy, among other pollution-control-related areas (e.g. filters for coal-fired

power plant, water and air purifiers, etc.) under the spotlight.

Indeed, largely due to policy support and rising public concern, we are seeing a

gradual shift of energy consumption away from coal to renewable and less

polluting energy sources, including natural gas, hydro, wind, and solar power,

leading to explosive growth of capacity installation in these new energy sources in

recent years.

While the alternative energy space has been developing fast, we believe it is still

at the nascent stage because: (a) China’s energy dependence on coal remains

very high in global terms; and (b) the economics of using renewable energy

havemeaningfully improved, and application of technology will likely bring costs

down further in the foreseeable future.

We like the following market leaders in the alternative energy space:

o Gas: China Resources Gas

o Wind: Huaneng Renewable Energy

o Hydro: Yangtze Power

Exhibit 130: Environmental protection has become a

serious concern in China

Exhibit 131: The shift in energy consumption mix is

gradually taking place

Source: Aquastat,, World Bank, CNEMC

Source: BP Statistical Review

71

76

70

71

72

73

74

75

76

77

2007 2011

Aiur Pollution Index

(Avg. of 62 cities)

2159

2060

2,040

2,060

2,080

2,100

2,120

2,140

2,160

2007 2011

Renewable water per capita

(tho. m^3)

11.8%

11.9%

12.0%

12.1%

12.2%

12.3%

12.4%

12.5%

12.6%

12.7%

12.8%

2007 2011

Arable Land

(As % of Total)

12.8%

11.9%

65%

70%

75%

80%

85%

90%

95%

100%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Energy Consumption Mix by Energy Categories in China

Renewable and others Hydro Natural gas Oil Coal



Exhibit 132: Capacity installation for solar, nuclear, and

wind energy are forecasted by our analysts to remain

strong in 2014 and 2015

Exhibit 133: Economics of using alternative energy has

meaningfully improved



34%29%

14%11%

5%

78%

39%

24%

14%

6% 4%

49%

36%

20%

12%

4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Solar Nuclear Wind Natural gas Hydro Coal

Capacity Expansion (yoy)

2013E 2014E 2015E

213%

0.9

0.6

0.5

0.4

0.30.2

0.8

0.5 0.5

0.30.3

0.2

0.7

0.5 0.5

0.30.3

0.2

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Solar Wind Gas Coal Hydro Nuclear

2011 2012 2013ELCOE (Rmb/kWh)



Events in 2014 and beyond

Exhibit 134: Near-term events include China CEWC, Fed taper, BOJ easing, India/Indonesia elections

Event timeline

Source: Consensus Economics, media sources, Goldman Sachs Global Investment Research

Month Country Events/elections/government changes and meetings

Nov - Dec India Legislative elections in India

Early Dec China Central Economic Working Conference (CEWC)

Dec Korea Potential appointment of the next central bank governor

Late this year Korea Potential change of cabinet (earliest time line)

Feb - Apr Asia: 4Q13/FY13 reporting season

Mar 18-19 United States Potential QE tapering announcement

Apr 1 Japan Consumption tax hike from 5% to 8%, BOJ Tankan Report

Apr 9 Indonesia Parliamentary election

Apr 30 Japan BOJ Monetary Policy Meeting (Potential further easing)

May - Jun Asia: 1Q14 reporting season

May India Parliamentary election

May 22 - 25 European Union Presidential election

May United Kingdom Parliamentary election

May Greece Presidential election

May Portugal Parliamentary election

May Spain Parliamentary election

Jun 4 Korea Municipal election

Jul - Aug Asia: 2Q14 reporting season

July Indonesia Presidential election

Oct - Nov Asia: 3Q14 reporting season

Nov G-20 G-20 summit in Brisbane

Late 2014 Taiwan Municipal election

Time Country Next round of elections

2015 Thailand Parliamentary

2016 Australia Parliamentary

2016 Hong Kong Legislative

2016 Japan Parliamentary

2016 Philippines Presidential, legistlative and local elections

2016 Singapore Parliamentary

2016 Korea National Assembly

2016 Taiwan Presidential and parliamentary

2017 Hong Kong Presidential (Chief Executive)

2017 Singapore Presidential

2017 Korea Presidential

2018 China New govt at National People's Congress

2018 Malaysia Parliamentary

2014

2015 onwards

2013



Appendix 1: Goldman Sachs macro forecasts

Exhibit 135: GDP growth forecasts


Exhibit 136: Inflation forecasts

Exhibit 137: Foreign exchange forecasts



Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Greater China & North Asia

China 7.7 7.7 7.8 7.8 7.8 7.7 7.9 8.2 7.7 7.6 7.6 7.7 7.8 7.8

Hong Kong 1.5 3.2 3.7 4.4 2.9 3.7 1.8 3.9 4.3 4.7 4.4 4.4 4.4 4.4

Taiwan 1.3 2.4 3.8 3.9 3.0 3.3 3.4 3.4 4.1 4.0 4.0 4.0 3.8 3.9

Korea 2.0 2.9 3.7 3.8 3.3 4.2 4.2 3.9 3.6 3.3 3.6 3.7 3.8 3.9

India & ASEAN markets

India 5.1 4.5 5.0 6.2 4.6 4.2 4.2 4.9 5.4 5.7 5.9 6.1 6.4 6.6

Singapore 1.3 3.2 3.8 4.2 3.8 5.0 3.7 3.7 3.8 3.9 3.8 4.2 4.2 4.3

Indonesia 6.2 5.6 5.3 6.0 5.6 5.0 5.6 5.3 5.1 5.3 6.2 6.1 5.4 6.1

Malaysia 5.6 4.7 5.0 5.2 5.0 5.1 4.9 5.1 4.9 4.9 5.3 5.2 5.3 5.2

Philippines 6.8 7.0 6.3 6.5 7.0 5.9 6.4 6.4 6.3 6.4 6.4 6.5 6.7 6.3

Thailand 6.5 3.4 4.2 4.5 2.7 2.5 4.2 4.3 4.3 4.0 4.5 4.4 4.5 4.5

Asia ex Japan 6.1 6.1 6.4 6.7 6.2 6.3 6.3 6.6 6.4 6.4 6.6 6.6 6.7 6.8

Australia 3.7 2.3 2.0 2.6 2.1 2.0 1.9 1.8 2.2 2.2 2.3 2.5 2.6 2.9

Japan 2.0 1.8 1.6 1.2 2.7 3.3 3.2 1.3 1.1 0.6 0.0 1.5 1.9 1.2

US (yoy) 2.8 1.7 2.9 3.2 1.7 2.0 2.5 2.7 2.9 3.4 3.4 3.2 3.1 3.0

US (qoq ann.) 2.8 1.7 2.9 3.2 2.8 1.5 3.0 3.5 3.5 3.5 3.0 3.0 3.0 3.0

Euro area (0.6) (0.4) 1.1 1.5 (0.4) 0.4 0.9 0.9 1.2 1.4 1.4 1.6 1.6 1.6

World 3.1 2.8 3.6 4.0 2.9 3.2 3.5 3.5 3.6 3.7 3.8 3.9 3.9 3.9

Real GDP

forecasts (% yoy)2012 2013 2014 2015

2013E 2014E 2015E

Inflation (yoy) 2012 2013F 2014F 2015F

Australia 1.8 2.4 2.9 2.6

China 2.7 2.6 3.1 3.0

Hong Kong 4.1 4.0 3.3 3.3

India 7.5 6.3 6.5 6.1

Indonesia 4.3 8.2 6.8 5.5

Korea 2.2 1.2 2.4 2.6

Malaysia 1.7 2.3 2.8 2.6

Philippines 3.2 3.2 3.8 3.5

Singapore 4.6 3.0 3.3 3.5

Taiwan 1.9 0.8 1.4 1.8

Thailand 3.0 2.5 2.8 3.0

AeJ 3.7 3.4 3.9 3.7

FX (vs. USD) 2012 2013F 2014F 2015F

Australia 1.04 0.96 0.87 0.85

China 6.29 6.14 6.05 6.05

Hong Kong 7.75 7.80 7.80 7.80

India 54.78 64.00 65.00 66.95

Indonesia 9670 12000 11800 11800

Korea 1071 1080 1100 1150

Malaysia 3.06 3.20 3.15 3.00

Philippines 41.19 43.50 40.00 38.00

Singapore 1.22 1.25 1.15 1.15

Taiwan 29.14 29.80 29.00 28.70

Thailand 30.63 33.00 32.00 30.00



Appendix 2: Valuations at a glance

Exhibit 138: Consensus bottom-up valuations


Bloomberg P/E (X) EPS growth (%) P/B (X) D/Y (%) ROAE (%)

ticker 2013E 2014E 2013E 2014E 2013E 2013E 2013E

MSCI markets (local currency)

Australia MXAU 16.0 14.4 4.9 10.5 2.0 4.4 12.9

China MXCN 10.1 9.2 12.8 10.3 1.5 3.2 15.5

Hong Kong MXHK 16.4 14.9 9.7 9.6 1.3 2.7 8.3

India MXIN 16.2 14.2 5.7 14.0 2.5 1.5 16.0

Indonesia MXID 15.2 13.2 10.4 15.5 3.1 2.7 21.6

Japan MXJP 17.1 14.5 64.3 18.7 1.3 1.8 8.2

Korea MXKR 10.4 8.6 9.6 20.1 1.2 1.0 11.3

Malaysia MXMY 16.7 15.4 -1.6 9.0 2.2 2.9 13.5

Philippines MXPH 19.5 18.4 9.7 6.0 3.1 2.3 16.5

Singapore Free SIMSCI 15.2 14.0 -3.8 8.7 1.4 3.4 9.8

Taiwan MXTW 15.6 13.9 27.0 11.9 1.8 3.1 11.6

Thailand MXTH 13.5 11.8 11.3 14.2 2.2 3.2 16.8

AC Asia Pacific ex Japan MXAPJ 13.3 11.9 8.5 12.3 1.6 3.1 12.6

AC Asia ex Japan MXASJ 12.6 11.1 10.1 13.1 1.5 2.5 12.5

USA MXUS 16.6 15.1 6.4 10.0 2.6 2.0 16.1

Europe (USD) MSDUE15 15.2 13.3 -3.2 14.4 1.7 3.3 11.7

EAFE (USD) MXEA 15.5 13.6 2.9 13.6 1.6 3.1 10.8

Emerging Markets MXEF 11.7 10.7 2.8 9.1 1.5 2.8 13.3

AC World (USD) MXWD 15.4 13.9 4.1 11.1 2.0 2.5 12.8

MSCI AC Asia Pacific ex Japan GICS sectors (local currency)

Energy MXAPJEN 11.7 10.5 0.7 11.1 1.4 3.4 12.3

Materials MXAPJMT 15.3 12.7 -2.1 19.8 1.6 2.7 10.6

Industrials MXAPJIN 18.2 14.1 -10.1 29.2 1.4 2.5 7.7

Consumer discretionary MXAPJCD 12.9 11.2 6.9 14.5 2.0 1.9 16.0

Consumer staples MXAPJCS 22.0 19.4 2.2 13.4 2.8 2.8 13.1

Health care MXAPJHC 24.2 20.9 12.9 16.1 4.4 1.7 18.9

Financials MXAPJFN 11.9 10.9 7.3 9.0 1.4 3.9 12.0

Information technology MXAPJIT 11.7 10.5 34.0 11.0 2.0 1.6 18.0

Telecommunication services MXAPJTC 14.5 13.8 5.8 5.4 2.1 4.4 15.3

Utilities MXAPJUT 15.6 13.4 24.7 16.5 1.5 3.2 9.4



Appendix 3: China reform policies

Exhibit 139: Key reforms from the 3rd Plenum

Source: Xinhua News, Goldman Sachs Global Investment Research.

Key reforms from Third Plenum decision document

Market economy/deregulation/financial reform

New approach: negative list, easier company registration/approval, registered capital subscription

Market pricing reform in water / oil / gas / power / transport / telecom

Land market: Unify urban/rural construction land market

Financial reform:

Private small/medium banks

Registration system for IPO

Speed up interest rate deregulation

Market-pricing of CNY / treasury yield

Speed up capital account convertibility

Deposit insurance

Capital market exit channel (bankruptcy/delist?)

Corporate-oriented reform in science/ academia

Support FTZ development

Improve market entry institution / customs regulation / investment protection / e-commer

Potentially open more FTZs In other qualified regions

More opening up of inland adjacent areas

Liberalize foreign investment access

SOE vs private enterprise

Maintain essential role of the public ownership economy

Support mixed ownership economy: cross holdings between public/private

State owned assets mgmt: establish various state owned assets mgmt companies

SOEs to focus on public good: focus on national security, crucial sectors, public services etc

Social security fund: transfer some SOE shares over to fund safety nets

Natural monopoly SOEs: separate party and operational structure

Encourage competition, open the market for competitive business to non-SOEs

Corporate governance focus, enhance transparency/disclosure and market based operation

Payout ratio raise to 30% by 2020, for social welfare use

Create fair environment for private capital and allow to non-SOEs enter authorized business area

Lower entry barrier/establish negative list for investment. Simplify business registration procedures

Fiscal / taxBudget system reform: more longer term, more accountability and transparency

Enhance debt management and risk alert system for central and local governments

Fiscal expenditure structure: Increase transfer payments to underdeveloped areas

Tax:

simplify VAT

Increase consumption tax for high pollution / energy inefficient / luxury products

Speed up legislation for property tax, resource taxes, environmental protection taxes

Expenditure allocation between central/local gov'ts: fiscal transfer reforms

Establish governmentbalance sheet at national and local levels



Exhibit 140: Key reforms from the 3rd Plenum

Source: Xinhua News, Goldman Sachs Global Investment Research.

Key reforms from Third Plenum decision document

Urban / rural

More asset ownership rights to farmers: Allow farmers to trade / lease / profit land or property, establish

rural property market

More protection to farmers: encourage investment projects in rural areas

Urbanization:

Allow local government to diversify funding channels including debt and private capital

Hukou reform: fully open hukou in smaller cities, gradually open hukou in mid sized cities

Include urban residents with rural hukous into the social and housing safety net system

Connect rural pension / healthcare programs with urban systems

Allow diversified investment (incl foreign) into areas like childcare, senior care, etc

Safety nets

Establish appropriate income distribution system: (some overlap with income redist above)

Align wage growth with productivity growth, ensure minimum wages

Improve collective bargaining system

Improve income redistribution through tax, transfer payments and social welfare system

Establish individual income/asset ownership data system

Social welfare / pension system:

Improve personal pension account system, incentivize contribution

Improve minimum living standards protection for urban/rural areas

Expand social insurance coverage, lower fee rates

Improve fiscal contribution and budgeting into welfare system

Develop diversified pention products such as annuities

Study gradual increase of retirement age threshold

Health care reform:

Comprehensive reform on medicial insurance, service, pharm chains and supervision;

Encouraging private capital involvement in hospital operations

Eliminate subsidizing service fees with medicine revenue

Enhance critical illnesses treatment / insurance schemes

Anti-corruption/govt administration

Streamline administrative processes: reduce meetings, documents and other unnecessary items

Control spending

Fortify budgeting and auditing system

Reduce 'san gong' spending and govt buildings construction

Explore 'official residence' system

Regulate business affairs of officials' relatives

Sophisticate macro control system: monetary / fiscal / price / industry specific policies

Develop national database of individual property ownership and credit records

Withdraw administrative approvals, tackle overcapacity

Revise econ KPI for gov't officials: include environment / debt / overcapacity / innovation etc

Gradually restructure public institutions into corporates

Streamline administration structure, control public service headcounts

Others

One child policy: Two children will be allowed for a couple as long as one of the couple is an only child

Environmental protection: enhance natural resources assets ownership/usage system, apply usage

with compensation system, increase industrial land price.

Culture reform: consolidate media resources; encourage mergers and acquisitions

Reform standardized testing system: lean away from one time college education system



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Disclosure Appendix

Reg AC

We, Timothy Moe, CFA, Kinger Lau, CFA, Richard Tang, CFA and Sunil Koul, hereby certify that all of the views expressed in this report accurately

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