Asian Growth Story

8/8/2019 Asian Growth Story

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Wednesday

Lecture Theatre 16

August 25, 6pm

Semi Annual

Investment

ForumProgramme

5.30pm Registration

6.00pm Market Outlook & Stock Picks

(Calvin Tan, NUS Invest Research Director))

6.30pm Economic Overview

(Liang Shibin, Investment Analyst at Phillips

Securities)

7.15pm Asian Growth Story, Strategies & Insights

(Ow Tai Zhi, NUS Invest President)

7.45pm Value Investing & Portfolio Management

(Jason Low, Portfolio Manager)

8.45pm Refreshments and End of Event

Supported By:
http://www.phillip.com.sg/index.htm


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The Semi-Annual Investment Forum (SIF) is an ongoing initiative by NUS Invest to promote

financial literacy and provide a platform to share investment knowledge in the NUS community.

The inaugural SIF held in March 2009 features the Research Team from DMG & Partners

Securities speaking on the Market Outlook as well as the Real Estate and Oil & Gas Sector.

The 4th SIF held on 24 August 2010 features the Research Team from Phillips Securities

providing an economic overview and listing out asset classes which are attractive to investors in

the current economic climate. Members were also exposed to the new Asia Pacific Ex Japan

Absolute Return portfolio and several conviction stock picks by NUS Invest Exco Research Team.

For the very first time, Mr. Jason Low, an experienced portfolio manager who has managed

funds in excess of US$500 million for the last 5 years, shared his value investing tips and how

retail investors should construct their portfolio.

EVENT SYNOPSIS


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This research material has been prepared by NUS Invest.

NUS Invest specifically prohibits the redistribution of this material in whole or in part without the

written permission of NUS Invest.

The research officer(s) primarily responsible for the content of this research material, in whole or

in part, certifies that their views are accurately expressed and they will not receive direct or

indirect compensation in exchange for expressing specific recommendations or views in this

research material.

DISCLOSURES & DISCLAIMERS


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Nothing in this research material constitutes a representation that any investment strategy or

recommendation contained herein is suitable or appropriate to a recipients individual

circumstances or otherwise constitutes a personal recommendation. It is published solely for

information purposes, it does not constitute an advertisement and is not to be construed as a

solicitation or an offer to buy or sell any securities or related financial instruments.

No representation or warranty, either expressed or implied, is provided in relation to the

accuracy, completeness or reliability of the information contained herein. The research material

should not be regarded by recipients as a substitute for the exercise of their own judgement. Any

opinions expressed in this research material are subject to change without notice.

DISCLOSURES & DISCLAIMERS


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Compliance

Equity Research & Portfolio

Administration

Stock-brokering & WealthManagement

Macro Investment

Research at Hedge Fund

National Service

Studies

Speaker Profile Ow Tai Zhi [President, NUS Invest]


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Asian Growth Story Strategies & Insights

[25 August 2010]


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Encouraging Global Economic Outlook

DivergingGrowth

Trajectory

Shift inGlobal Asset

Allocation

AsianCentral Bank

Rate Hikes

QuantitativeEasing by

the U.S.

InvestmentStrategies

Risk

IMF World Growth Figures

1Q 2010 5.00%

IMF World Growth Projection

2010 4.50%

2011 4.25%

Modest but steady recovery in most advanced economies

Strong growth in many emerging and developing economies

Recent turbulence in financial markets caused by fiscal positions in Euro-zone


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Divergence in Growth Outlook

2010 2011

United States 3.3% 2.9%

Japan 2.4% 1.8%

United Kingdom 1.2% 2.1%

Euro Area 1.0% 1.3%

Germany 1.4% 1.6%

France 1.4% 1.6%

Italy 0.9% 1.1%

Developing Asia 9.2% 8.5%

China 10.5% 9.6%

India 9.4% 8.4%

Singapore 9.9% 4.9%

ASEAN 5 6.4% 5.5%

Source: IMF World Economic Outlook

Strong rebound in

exports and resilient

domestic demand

Robust corporate

profits and FDI


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2010 2011

World Trade Volume (goods & services) 9.0% 6.3%

Imports

Advanced Economies 7.2% 4.6%

Emerging & Developing Economies 12.5% 9.3%

ExportsAdvanced Economies 8.2% 5.0%


Consumer Prices

Advanced Economies 1.4% 1.3%


Advanced Economies (U.S., Europe) vs Emerging & Developing Economies (Asia)


Tendency for Central

Bank policy rate hiketo contain inflation


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In 2011, when inventory cycle

runs its full course and stimulus

is withdrawn in several

countries, Asias GDP will settleto a more moderate but

sustainable rate (est. 6.75%)



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Downside Scenario Additional Worsening in Eurozone

Downside Risks

1. Poor fiscal consolidation stifles

weak domestic demand (eg.

austerity measures)

2. Management of fiscal deficits

over medium to long-term

3. Renewed weakness in U.S.

property market

GPM World Simulations

World growth will reduce from

4.50% to 3.00%


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Shift in Global Funds Allocation

China more than doubled (up 111%) South Korean debt holdings to US$3.4 billion

in 2010 (0.1% of its US$2.45 trillion reserves) as global trend of policy makers is to

gradually shift foreign reserves out of USD

Foreign holdings of South Koreas outstanding govt debt (accounts for 6.3%)increased 20% from US$9.6 billion to US$57.5 billion in 1H 2010

China purchase US$20.1 billion of Japanese Govt Bonds in 1H 2010

The number of long-term investors who view Korean bonds as a new safe haven has

increased Director of the Ministry of Strategy & Finance's govt bond policy division


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Central Banks Tendency for Rate Hikes

Petroleum price projection

US$75.3/bbl for 2010

US$77.5/bbl for 2011

2 Key Influencing Factors

Broad inflation targeting between 2% to 4%

Asset price pressures

Base Case

Advanced Economies unlikely to tighten

before 2011, in fear of undermining the

recovery

Emerging & Developing Economies have

started to tighten (eg. Korea, India, Taiwan,

Malaysia)

DivergingGrowth

Trajectory


Allocation

Asian CentralBank Rate

Hikes

QuantitativeEasing by the

U.S.


Risk


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Explanation Notes on Central Bank Rate Hike

Assume the entire economy consist only Jack and 10 apples.

Jack has $10 and decides to use all his money to buy the 10 apples,

because the 0.75% interest rate on deposits simply sucks.

Then


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U.S. Federal Reserve Bank raises benchmark rates and Citibank raises the

interest rate on deposits to 2.99% accordingly.

Jack is now enticed by the attractive interest rate, and decides to put some

money in the bank and consequently spend less on apples.

Explanation Notes on Central Bank Rate Hike


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Quantitative Easing by the U.S.

DivergingGrowth

Trajectory


Allocation

Asian CentralBank Rate

Hikes

QuantitativeEasing by the

U.S.


Risk

27 Aug Nobel Prize-winning economist Paul

Krugman suggest the Federal Reserve and

President Barack Obamas administration

should launch further stimulus programs.

Krugman, a Princeton University professor,

wrote in his New York Times column policy

makers should be doing everything they can

to change that fact.

Ben Bernanke is likely to spell out options for

restarting large-scale purchases of securities,

a strategy known as quantitative easing.

Impact

Quantitative Easing will put

downside pressure on the USDagainst major currencies.


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Investment Strategies Long Asian Currencies

1. Future growth likely to decelerate but continue

Recent economic indicators points to slowdown in 2H 2010. However, growth likely

to continue, although at a slower pace.

2. Relative strategy as opposed to Absolute strategy to limit downside risk

Investment in equities pose downside risk as expectations of growth are priced in,

but slowdown in growth may not. Commodities largely depends on industrial

demand and pose downside risk as well.

3. Need to cherry-pick the top few Asian currencies as fundamentals differ

Different growth trajectory within Asia, different drivers of economic growth,

different inflation levels and central bank policy stance.

DivergingGrowth

Trajectory


Allocation

AsianCentral BankRate Hikes

QuantitativeEasing bythe U.S.


Risk


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Chinese Renminbi (CNY)

Central banks Policy Stance

Large fluctuations not desired, need to

support relatively fast growth while

managing inflation expectations

FX Impact on ExportsNet Exports US$250 billion

GDP US$4,814 billion

Industry accounts for 47% of GDP

Exports to U.S. 20% and Germany 4%

Key Statistics

GDP 2010F 10.5%

GDP 2011F 9.6%

Central Bank Rate 5.31% -> 5.85% by end 2010

Latest Rate Hike 12.5bps in June 2010

Spot Rate 6.7988

Consensus Est Appreciate 4.7% to 6.48

Implied Based on NDF Depreciate 1.6% to 6.69

Herein lies the arbitrage opportunity!


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Euro Debt

Crisis1st Reforms in yuan

exchange rate

Risk

Aversion

+/- 0.5% from

daily fixing

2nd Reforms in yuan

exchange rate

10.2% appreciation over last 3 years


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Euro Debt Crisis

2nd Reforms in yuan

exchange rate

Risk Aversion

+/- 0.5% band

from daily fixing


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Malaysian Ringgit (MYR)


Expects domestic economy to

remain strong with continued

improvements in private

consumption and investment


GDP US$209 billion


Exports to U.S. 12%

Key Statistics

GDP 2010F 6.7%

GDP 2011F 5.3%

Central Bank Rate 2.75% -> 2.75%

Latest Rate Hike 25bps each in May and July 2010

Spot Rate 3.14


Implied Based on NDF Depreciate 1.6% to 3.19



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Risk Aversion

Euro Debt Crisis

Rate Hike



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Euro Debt

Crisis

Risk

Aversion

Rate Hike

Rate Hike


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Singapore Dollar (SGD)

Central banks Policy StancePolicy band re-centered upwards in

April 2010 and switch from 0%

appreciation to modest and gradual

appreciation


GDP US$177 billion


Exports to U.S. only 6.6% in 2009

Key Statistics

GDP 2010F 9.9% -> 13%

GDP 2011F 4.9%

Central Bank Rate 0.67% borrowing rate; 0%

deposit

Latest Rate Hike -

Spot Rate 1.3584


Implied Based on NDF Stay flat



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Euro DebtCrisis

S$NEER Re-centered

downwards

Risk

Aversion



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Euro Debt

Crisis

Risk

Aversion

Re-centering of

S$NEER band


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Potential Returns

DivergingGrowth

Trajectory


Allocation




Risk

Leverage Characteristics Currencies typically has more than 4x leverage

Past 3 Years Returns (incl Great Financial Crisis and Euro Debt Crisis)

CNY 10.2% x 4 = 40.8% 14.0% p.a.

MYR 10.0% x 4 = 40.0% 13.6% p.a.

SGD 11.0% x 4 = 44.0% 15.2% p.a.


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Possibility of Monetary Intervention

All except India have healthy trade

surplus

Exchange rates appreciation is needed if

excess demand pressures build

(ie. excessive trade surplus or asset price

pressures)

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

China India Indonesia Japan Korea Malaysia Taiwan

Trade Data

Trade Surplus GDP

DivergingGrowth

Trajectory


Allocation




Risk


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Q&A


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Japanese Yen (JPY)


Extremely accommodative monetary

policy, uptrend in exports expected to

continue, although pace to moderate

gradually, domestic demand and private

consumption generally picking up

FX Impact on Exports

Net Exports US$43 billion

GDP US$4,150 billion


Exports to U.S. 16%

Key Statistics

GDP 2010F 2.4% -> 2.6%

GDP 2011F 1.8%

Central Bank Rate 0.10%

Latest Rate Hike -

Spot Rate 84.55

Consensus Est Depreciate 12.4% to 95.00

Implied Based on NDF Appreciate 0.6% to 84.07


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Risk Aversion

Euro Debt

Crisis

Euro Debt

Crisis


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Euro Debt

Crisis

Risk

Aversion


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Korean Won (KRW)


Accommodative monetary policy to

target price stability and sustained

growth

Inflation targeting of 2% to 4% from

2010 to 2012

CPI will accelerate and interest rate

is still not appropriate as inflation

expectations climb

Key StatisticsGDP 2010F 5.7%

GDP 2011F 5.0%


Latest Rate Hike 25bps in July 2010

Spot Rate 1,184

Consensus Est Appreciate 7.6% to 1,100

Implied Based on NDF Depreciate 1.3% to 1,199

Net Exports US$56 billion compared to US$809 billion GDP



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Euro Debt Crisis

Rate Hike


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Taiwanese Dollars (TWD)


continue gradually adjusting interest

rate upwards in response to strong

domestic economic activity

Key Statistics

GDP 2010F 7.7%

GDP 2011F 4.3%


Latest Rate Hike 12.5bps in June 2010


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Euro Debt Crisis


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Indonesia Rupiah (IDR)


Inflation targeting of 4% to 6% (Jul

2010: 6.2%) for 2010 and 2011, no

immediate intent of rate hike

Key Statistics

GDP 2010F 6.0%

GDP 2011F 6.2%

Central Bank Rate 6.50%

Latest Rate Hike -

Spot Rate 6.79

Consensus Est Appreciate 2.2% to 8,800

Implied Based on NDF Depreciate 4.5% to 9,397


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Euro Debt Crisis

Asian Growth Story

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