Investment Views Asia 1 st quarter 2013 Foreword 3 Current market assessment 4 1. Focus Asian outlook 6 Asian selection 8 2. Countries China / Hong Kong 10 Singapore 12 Malaysia 14 Indonesia 16 South Korea 18 Thailand 20 Australia 22 Investment management mandates 24 Contacts 25 3. Notes Methodology 28 Glossary 28 Disclaimer 30 Contents Foreword Asia – the bright spot Dear Reader The start of a new year is traditionally a time for crystal ball gazing. We peer into the future with a mixture of hope, anxiety and foreboding. Will we stay healthy? What challenges will face us at work? Will the world stay safe for our loved ones? We simply don’t know, of course. But we are not powerless. By taking sensible precautions we can make it more likely that things will turn out the way we want. This also applies to VP Bank’s investment strategy. We cannot change the economic realities, but we can still make sensible and rewarding investment decisions based on a careful assessment of risks and opportunities. Economic reality in 2013 will again be rather sombre in many parts of the world. Progress has been made in tackling the eurozone debt crisis, but the economic consequences of this financial debacle have left deep wounds in the affected countries and are seriously undermining the performance of the global economy. World trade is stagnating, and investment growth is being stifled by uncertainty. The eurozone will register zero growth in 2013, while America will feel the impact of the compromise agreement on circumnavigating the “fiscal cliff”. We expect US growth in 2013 to lag behind the consensus forecast. It is now clear that the industrialised world is facing a succession of lean years. The 2009 crisis and its economic repercussions were under- estimated. The clean-up of public finances and the restructuring of economic models will take longer than even the pessimists expected. The bright spot is Asia. Here too, economic momentum is less vigorous than in the past, but the Asia-Pacific region is buoyant compared with the rest of the world. Indeed, these economies are now the driving force behind global growth. This second issue of Investment Views Asia will, we hope, provide you with useful guidance when making investment decisions in Asian markets. Our analysts paint a mixed picture. While China is getting into its stride again thanks to massive infrastructure spending, other countries (notably Thailand) will face slower growth this year. Equity market prospects vary greatly from country to country. This makes it all the more important to carry out a detailed assessment that takes due account of economic fundamentals, corporate positioning and market valuation. Asia cannot be treated as a homogeneous whole. Our analysis focuses on the specifics of each country and market. A new feature of this issue is the article on Australia. This country deserves special attention as an important investment destination in the Asia-Pacific region. We wish you an enjoyable read and a successful 2013. Reto Isenring Managing Director VP Bank (Singapore) Ltd. 4| 1 st quarter 2013 | Current market assessment The tables below summarise VP Bank's trend assessments for all asset classes in our investment universe. The arrows reflect the forecasts of our investment strategists for the coming three to six months. The trends for currencies and equities indicate expected percentage changes in value. The bond assessments indicate expected changes in yields, expressed in basis points. The symbols are explained in the key at the bottom of the page. Current market assessment Key interest rates Japan China Hong Kong South Korea Malaysia Indonesia New Thailand Equities Europe North America Pacific • Japan New • Australia New • Singapore Emerging markets New • China • Indonesia • Thailand New • South Korea New • Malaysia Currencies – Expected appreciation/depreciation: > +5% +2% to +5% –2% to +2% –5% to –2% < –5% Bond yields, key interest rates – Upside/downside ranges indicated by our 3–6 month absolute performance assessments: > +50 basis points +25 basis points No change –25 basis points < –50 basis points Equities – Upside/downside ranges indicated by our 3–6 month absolute performance assessments: > +5% +2% to +5% –2% to +2% –5% to –2% < –5% Currencies EUR vs. USD JPY vs. USD AUD vs. USD CNY vs. USD New HKD vs.USD SGD vs. USD KRW vs. USD MYR vs.USD New IDR vs.USD THB vs.USD New Bond yields Japan China New Hong Kong Singapore South Korea New Malaysia Indonesia Thailand New Emerging market bonds, general Hard currency EMA Local currency EMA January 2013 October 2012 January 2013October 2012 n.a. n.a. 1. Focus Asian outlook | Dr Thomas Gitzel Asia powering global growth 6| 1 st quarter 2013 | Focus | Asian outlook According to the Mayan calendar the world should have ended on 21 December 2012. It didn’t, and it won’t end in 2013 either. Nor will the global economy, despite the apocalyptic chanting of the gloom-mongers. World eco- nomic growth will be slow compared with the past, but we are not facing meltdown. While the industrialised nations are unlikely to provide much stimulus in 2013, the Asian region is becoming the central pillar of global economic growth. Industrialised economies tread water We see no evidence of an accelerating global economy in 2013. Growth will be at about the same level as last year. Uncertainty about the eurozone debt crisis and fears of a protracted period of macroeconomic doldrums are discour- aging business investment. At the same time most industri- alised countries are being forced to tighten their belts. This does not apply only to the eurozone. We expect the US economy to grow by only 1–1.5% in the coming year. Even the flamboyantly successful Australian economy is facing leaner times. Confronted with a relatively high budget deficit of 3.7% of GDP, the Australian government now intends to put a brake on public expenditure. These negative factors are stifling world trade. International flows of goods are stagnating. This is putting a serious damper on export-driven growth in the emerging markets. Flagging exports result in weaker investment growth. On balance, the emerging markets will therefore also be feeling the pinch. Structural problems in the BRIC economies are adding to the difficulties. Russia and Brazil have relied too heavily on the commodities boom and failed to make neces- sary investments outside the resources sector. Brazil’s problems have been exacerbated by a massive currency appreciation, which has seriously dented the country’s competitiveness. India, meanwhile, has sealed itself off from inflows of international capital and now seems to be paying the price in the form of a structural slowdown of growth. World trade Asia still the powerhouse Thus the Asian region is yet again functioning as the power- house of the global economy. Healthy public finances enable governments in these countries to combat decelerating growth by mounting large-scale public infrastructure projects. The best example is China. Hard macro data in China have shown a positive trend in recent months, with industrial out- put, investment growth and retail sales all picking up again. We expect this improvement to continue in the coming quarters. We regard Chinese GDP growth of 8.5% for 2013 as realistic. The ASEAN 5 countries (Malaysia, Indonesia, Philippines, Singapore and Thailand) will also be able to accelerate, though growth rates here will remain relatively low. GDP growth of 5.8% in 2013 looks feasible, following an estimated 5.4% in 2012. World trade volume (% yoy) -20 -15 -10 -5 0 5 10 15 20 25 2000 2010200820062002 2004 2012 7| 1 st quarter 2013 | Focus | Asian outlook Equity market overview Conclusion The world economy is likely to post lower growth rates for the foreseeable future. The industrialised nations, in parti- cular, will be feeling the pinch. This makes Asia’s role in the global economy all the more important. The up-and-coming countries in this region offer interesting opportunities for investors, especially at current attractive valuation levels. Asian currencies: where now for the renminbi? Our baseline scenario for 2013 includes a further moderate appreciation of the Chinese renminbi. Further liberalisation measures should encourage continuing high inflows of capital and push the renminbi higher against the US dollar. But this is not a foregone conclusion. The Chinese government has often sprung surprises in the past. If the economy expands less vigorously than expected in the weeks ahead, Beijing might decide to push down the exchange rate. As the renminbi now functions as the anchor currency of the Asian region, a depreciation against the US dollar would pull down other Asian currencies in its wake. Monetary authorities in the rest of Asia would hardly be inclined to accept a loss of com- petitiveness against China. Attractive equity market valuations Equity markets in many Asian emerging countries have presented a much stronger picture since September. Their relative performance compared with the industrialised countries, South America and Eastern Europe has now taken a positive turn, and this trend looks set to continue. Above-average profit growth should ensure relative upward momentum in these markets, while the downside is limited due to attractive valuation ratios. But Asian markets should not be lumped together indiscriminately. Investors are advised to adopt a differentiated approach. We still see the biggest upside potential in China, where we continue to recommend the classic H shares market even after its recent outperformance of A shares. We are also confident about the outlook for the South Korean market, which stands to benefit from Korea’s easing of monetary policy and the attractive profit growth of various Kospi heavyweights. We remain cautious towards Malaysia and Indonesia. We also see risks in Australia, which we cover for the first time in this issue. Here we have a clear preference for mining over banks. Australia Indonesia South Korea Malaysia Hang Seng China Enterprises 80 85 90 95 100 105 110 115 120 125 Dec 11 Oct 12Aug 12Jun 12Feb 12 Apr 12 Dec 12 Asian selection 8| 1 st quarter 2013 | Focus | Asian selection Selected products Asia Actively managed funds Product name Benchmark ISIN Curr. NAV 1 Payout TER (%) YTD perf. % 1 Emerging markets – equities VP Bank Fund Selection Emerging Markets MSCI Emerging Markets Index LI0020062001 USD 1,866.29 no 1.62 1.87 Aberdeen Global Emerging Markets MSCI Emerging Markets Index LU0132412106 USD 70.49 no 1.98 2.05 Thames River Global Emerging Markets MSCI Emerging Markets Index IE00B1FGDG68 USD 15.16 no 2.08 2.57 Emerging markets – fixed income HSBC EMMA Debt Hard Curency JPM EMBI Diversified Index LU0164943648 USD 34.78 no 1.36 0.54 Pictet EMMA Debt Hard Currency JPM EMBI Diversified Index LU0128467544 USD 331.37 no 1.45 1.02 Julius Bär EMMA Debt Local Currency JPM ELMI+ Index LU0107852195 USD 332.60 no 1.96 0.37 ING EMMA Debt Local Currency short term JPM ELMI+ Index LU0546916379 USD 61.91 no 1.35 0.54 Pictet Emerging Currency short term JPM ELMI+ Index LU0366532561 USD 107.97 no 1.20 0.26 Pimco EMMA Debt Local Currency short term JPM ELMI+ Index IE00B1FHFN09 USD 13.93 no 0.85 0.51 Asia – equities VP Bank Fund Selection Emerging Asia MSCI Emerging Asia Index LI0014803600 USD 2,498.07 no 1.91 2.00 Schroder Emerging Asia MSCI Emerging Asia Index LU0181495838 USD 25.64 no 1.99 2.56 Franklin Templeton Asian Growth MSCI Asia ex Japan Index LU0128522157 USD 36.45 no 2.20 3.29 Aberdeen Global Asia Pacific MSCI Asia Pacific ex Japan Index LU0011963245 USD 73.70 no 1.96 1.97 Fidelity South East Asia MSCI Far East ex Japan Index LU0048597586 USD 7.01 yes 1.95 2.13 Henderson Asian Property FTSE EPRA Asia Index LU0229494975 USD 15.74 no 2.02 0.96 Asia – fixed income Pictet Asian Debt Local Currency HSBC Asian Local Bond Index LU0255797556 USD 155.76 no 1.60 0.45 Franklin Templeton Asian Bond HSBC Asian Local Bond Index LU0229949994 USD 18.57 no 1.38 0.54 Aberdeen Asian Debt Local Currency short term iBoxx Asia ex Japan Sovereign Index LU0094548533 USD 7.01 no 1.29 0.46 Man Convertibles Far East ML Convertible Asia Pacific Index LU0061927850 EUR 1,621.55 no 1.81 1.32 Fidelity Asian High Yield FF Asian High Yield Index LU0286668453 USD 13.45 no 1.41 0.37 Exchange traded funds (ETFs) Product name Benchmark ISIN Curr. Price 1 Replication TER (%) YTD perf. % 1 Emerging markets – equities db x-trackers - MSCI Emerging Markets MSCI Emerging Markets LU0455009778 USD 4.20 Derivative 0.65 2.94 Asia – equities db x-trackers - MSCI EMMA Asia MSCI Emerging Markets Asia LU0455009000 USD 4.01 Derivative 0.65 – Asia – fixed income ABF Pan Asia Bond Index Fund iBoxx ABF Pan-Asia SG9999002026 USD 131.30 Unknown 0.19 – iShares J.P. Morgan Asia Credit J.P. Morgan Asia Credit (USD) SG2D32970329 USD 10.78 Optimised 0.3 0.75 iShares Barclays Capital Asia High Yield Barclays Asia High Yield (USD) SG2D83975482 USD 11.21 Optimised 0.5 0.63 1 as of 03/01/2013 2. Countries Turnaround accomplished China’s GDP growth decelerated from 7.6% year on year in the second quarter to 7.4% in Q3, but the latest data indicate that a rebound is now under way. This positive trend looks set to gather strength in the first half of 2013. The mammoth infrastructure projects initiated by the Chinese government will take full effect in the months ahead. Consumers are also showing more confidence again. Retail sales should there- fore gain momentum. All in all, a GDP growth rate of 8.5% in 2013 seems realistic. Unpredictable renminbi The renminbi has appreciated strongly against the US dollar since last summer, chalking up a net gain of over 3%. Recent months have seen a sharp rise in the flow of capital into Asia as the Fed, ECB and Bank of Japan have flooded their markets with liquidity. The Bank of China has done nothing to curb the renminbi’s advance. Its currency reserves have stayed almost unchanged for over a year now. Thus the renminbi’s performance is in- creasingly being determined by market forces. Our baseline scenario sees a continued appreciation. It should not be forgotten, however, that the exchange rate is susceptible to manipulation by the Chinese government as an instrument of economic policy. Chinese exchange rate China / Hong Kong 10 | 1 st quarter 2013 | Countries | China / Hong Kong If GDP growth slackens again in the coming months, a deval- uation of the currency cannot be ruled out. Even in our base- line scenario we expect the renminbi’s appreciation against the US dollar to be only moderate. The continuing fragile state of the global economy makes a sharper rise unlikely. The Hong Kong dollar is also now trading at the strong end of its range, reflecting vigorous inflows of foreign capital. In view of the subdued inflation risk in Hong Kong, we believe that the Hong Kong dollar’s peg to the US dollar will be maintained. Chinese equities still cheap The Chinese equity market has continued to post a mixed performance in recent months, with a marked divergence between Hong Kong and the mainland. Hong Kong compa- nies (Hang Seng 35) have advanced by over 20% since the start of June, while the hard-to-access mainland China market (CSI 300) has been in continuous retreat since mid-year. Current low valuations (absolute and relative) and the gradual levelling out of downward profit revisions are fundamental arguments in favour of a long-term investment in Chinese equities. The macro turnaround could provide the trigger for a renewed equity market advance. Investors should focus on mainland shares with a primary listing in Hong Kong (China Enterprise Index). This market is trading at a price/earnings ratio of 8.8, around 40% below its historical average. It is also cheaper than the Hang Seng and CSI. USD/CNY 6.0 6.5 7. 0 7. 5 8.0 8.5 2006 2007 2008 2009 2010 2011 2012 [...]... Exchange traded funds (ETFs) 1 2 as of 03/01 /2013 Bloomberg estimates 23 | 1st quarter 2013 | Countries | Australia Australia & New Zealand Banking Group Return Investment management mandates Risk Conservative Equity allocation Investment horizon Balanced Growth 20% 35% 50% 5 years 7 years 10 years Liquidity requirement Expected return 24 | 1st quarter 2013 | Investment management mandates Bonds Your... Korea KOSPI 200 ETF KOSPI 200 Index HK0000098860 HKD 8.59 Derivative 0.39 3.12 1 2 as of 03/01 /2013 Bloomberg estimates 19 | 1st quarter 2013 | Countries | South Korea Curr Company Thailand 20 | 1st quarter 2013 | Countries | Thailand Weaker growth in 2013 The question whether Thailand’s economic growth in 2013 will be weaker or stronger than in 2012 is quickly answered: weaker GDP was boosted last... Hang Seng Investment Index Fund Hang Seng China Enterprises HK2828013055 HKD 121.20 Full 0.65 5.85 db x-trackers - CSI 300 Index CSI 300 Index LU0455008887 HKD 6.49 Derivative 0.50 5.02 Tracker Fund of Hong Kong Hang Seng Index HK2800008867 HKD 23.55 Full 0.15 3.06 1 2 as of 03/01 /2013 Bloomberg estimates 11 | 1st quarter 2013 | Countries | China / Hong Kong Company Singapore 12 | 1st quarter 2013 | Countries... db x-trackers MSCI Malaysia MSCI Malaysia LU0514694370 USD 14.39 Derivative 0.5 – Actively managed funds Exchange traded funds (ETFs) 1 2 as of 03/01 /2013 Bloomberg estimates 15 | 1st quarter 2013 | Countries | Malaysia Company Indonesia 16 | 1st quarter 2013 | Countries | Indonesia Investors expected to favour rupiah The Indonesian rupiah continued to backtrack in 2012, shedding 7% of its value against... perf %1 db x-trackers - MSCI Indonesia MSCI Indonesia LU0476289623 USD 15.16 Derivative 0.65 –0.20 Exchange traded funds (ETFs) 1 2 as of 03/01 /2013 Bloomberg estimates 17 | 1st quarter 2013 | Countries | Indonesia Price1 Company South Korea 18 | 1st quarter 2013 | Countries | South Korea Faster growth feasible Korea’s growth rate suffered a further marked slowdown in the second half of 2012 This export-oriented... profiting from a professional and disciplined implementation of your individual investment strategy For detailed information on our investment management mandates, please contact your personal advisor Asia mandate Strong Asian bias whilst maintaining global diversification Asian focus Investment strategies / risk profiles Current investment tactics The announcement by the European Central Bank that it is... area at the expense of US Treasuries and corporate bonds We still regard high yield bonds as attractive in view of their yield pick-up 25 | 1st quarter 2013 | Investment management mandates Investor motivation Contacts Many thanks for your interest in Investment Views Asia We will be happy to advise you on how to implement our recommendations in line with your individual requirements Please feel free to... +352 404 777 273 christoph.goergen@vpbank.com 26 | 1st quarter 2013 | Contacts Head of Commercial Banking VP Bank and Trust Company (BVI) Limited Head of Banking Sjoerd Koster, Tel +1 284 494 11 00 sjoerd.koster@vpbank.com Investment Services Center Tel +423 235 63 99 investment@ vpbank.com Tel +423 235 69 69 advisory@vpbank.com Investment Research Investment Advisory 3 Notes Methodology Equity selection... complemented by in-depth interviews with the fund’s managers In this way we are able to arrive at a comprehensive understanding of the products that we select 28 | 1st quarter 2013 | Methodology | Glossary Glossary Allocation Strategic Long-term division of an investment portfolio into various asset classes (money markets, bonds, equities, alternative investments) on the basis of a defined investment strategy... Fax +423 233 22 24 - igt@vpbank.com Published by Investment Research Verwaltungs- und Privat-Bank Aktiengesellschaft Aeulestrasse 6 LI-9490 Vaduz Tel +423 235 61 73 Fax +423 235 76 21 investmentviews@vpbank.com Editors and contributors Tom Chen, Investment Advisor Jane Foo, Senior Investment Advisor Thomas Rupf, Head of Investment Advisory & Trading Asia Marco Gabriel, Equity Analyst Dr Thomas Gitzel, . Investment Views Asia 1 st quarter 2013 Foreword 3 Current market assessment 4 1. Focus Asian outlook 6 Asian selection 8 2. Countries China. EMA January 2013 October 2012 January 2013October 2012 n.a. n.a. 1. Focus Asian outlook | Dr Thomas Gitzel Asia powering global growth 6| 1 st quarter 2013 |