Just fundamental strategies across the globe  

Posted by Book Eater

(Will edit this later.) -----Nix

I do not want to take credit for any report below because I am only narrating what I found "Neat" and "Astig" about the strategies these great minds of Citigroup and Morgan Stanley wrote. So, for you guys, here's a summary.


Reference: Citigroup’s Report – Jan. 28, 2008; “Asia Economic Outlook and Strategy (Correction)“


1.) In uncertain times, go for imminent cash flows, not capital appreciation.

2.) Based on current dividend streams, investors would get their money back in a mere 21 years in the case of Taiwan, 30 years in the case of Malaysia and 52 years in the case of China. In the case of India, investors need to wait a full 113 years for their payback.

3.) Sector wise, banks have the shortest payback period, energy the longest.


•Segway lang tayo kay Globe. - GLO - diba go for imminent cashflows?

Regular and special cash dividends paid out in 2007 amounted to P=15.3 billion, up 132% from the P=6.6 billion paid out in 2006. Total 2007 dividend of P=116 per share translates to a dividend yield of 7% based on end-2007 share prices, one of the highest in the country and among the telecom companies in the region.

- This is very interesting. For all the people who have a bad habit of being ipit investors, well then. Kay Tita GLO na lang kayo:) maasahan mo ang kanyang dividends.

Financial Conditions of the Markets today:

1.) Given the slowing of the global economy, earnings news may well be a drag on equity markets for some time.

2.) Prices for oil and other commodities have declined in recent weeks in response to concerns about global growth prospects.

3.) Actual volatility has pushed implied volatility in U.S. equity markets to the highest levels since 2003.

4.) Financial conditions index for the U.S. economy now is more than 1½ standard deviations below its neutral level. This current level has, in the past, been associated with recessions and significant monetary easing cycles.

5.) In December, housing indicators continued to deteriorate, retail sales pulled back, and the unemployment rate increased 0.3 percentage point to 5.0%.

However, we have probably not seen the full impact of a US recession yet

Asian economies are generally resilient, especially compared with those in Central and Eastern Europe. Within Asia, India is the most vulnerable, due mainly to its public debt, current and fiscal deficits (see figure below). Thailand and Singapore are also vulnerable due to their high dependency on trade and FDI. China is the most resilient, followed by the Philippines, Indonesia and Korea.


Short duration with growth is where you want to be

1.) Both cash flow – needed to pay a dividend – and yield have actually given investors better returns over the last 13 years than EPS growth. Stocks with secure cash flows and yields above those of Fed funds will start to look attractive to income/high-yield funds.

2.) Among the large sectors, banks are now the cheapest with a 23.8-year payback period. Only in 1991, in 1998 and then in 2003 did the banks have a shorter duration than today.

3.) Technology goes from growth with duration in excess of 300 years to now with duration of a mere 35.8 years.

4.) The idea of buying short duration with above-average EPS growth is not such a bad one. Since 2001, this strategy has proven to have a larger than 51% probability of outperforming the MSCI AC Asia ex Japan universe. In terms of simple average, this strategy has outperformed in 75% of the time since 2001. There has only been one poor year, 2005, where only 41.7% of the stocks outperformed. One bad year out of seven.

Short duration does especially well ahead of a GDP slowdown

We look at the performance of 5 duration quintiles over three time periods: the first

is 6 months prior to the 1998 Asian crisis (proxy for growth slowdown), the 2001

growth slowdown in the US. Next we have looked at the performance 12 months

prior and then we have looked at it during the actual recession/weak growth period.

In terms of sectors, the longs would be banks, real estate (the current

high yields from REITs help), telecoms, utilities and technology. The underweight

portfolio: energy, industrials, materials and consumers.

Even if history only rhymes, we believe earnings estimates are still way too high

If current ROE falls to the levels of 1991 or 2001 recessions, earnings appear set to fall by 31% or 52% even before taking into account the current IBES forecast of 15.7% growth for 08. Even if the current downturn is only half as bad, the earnings swing is 30%age pts. Earnings forecasts appear most at risk in the energy, materials, other financials & industrials sectors.

Valuation-wise (PBV), the biggest downside is in China, India and Indonesia. The least downside is in Thailand, Malaysia, Taiwan, telecoms, utilities and tech. Assuming it rhymes.

Asia ex is currently trading at 2.4 times P/BV. The low in 1991 was 1.4 times

P/BV and back in 2001 the low was 1.2 times.

Our investment style is to focus on cash flow, cash flow and more cash flow; dividend yield and more yield; large cap visibility over small and mid caps; and finally value over momentum. We are overweight telecoms, utilities, financials and consumers, and underweight energy, materials, industrials and technology.

The countries with the biggest premium to trough valuations are China (though the 2000 downturn does not include the financials, so it is different), Indonesia with a 78.8% downside and India with 65.8% downside to 1990/01 and 2000/01 trough valuations. The least amount of downside is Taiwan, basically flat vs the average of the troughs, Thailand at 21.6% downside and Malaysia at 31.3% downside. We are overweight both Taiwan and Malaysia, underweight Thailand. Even picking the “best” outcome out of the two downturns would still leave Thailand with 9.9% downside and in the case of Taiwan would actually generate 33.2% upside. Yes, it would be nice but we remain doubtful that we will get upside. As to the rest of the region, share prices would have to fall by 9.9% in Thailand, 14.7% in the case of the Philippines and in the worse of the good outcomes by 60% in India and 72.4% in Indonesia.

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