Credit Suisse: 10% To 15% Upside Seen For Asian Equities Next Year

Credit Suisse AG anticipates an upside of 10% to 15% for Asian equities next year, saying slowing inflation and monetary policy easing will be catalysts for a "reflation rally" in 2012.Sakthi Siva, Credit Suisse's Global Emerging Markets and Asia Pacific Strategist said she continued to prefer markets that are "under-owned" by foreign investors, such as Korea, China, Hong Kong and Australia, over more "crowded" markets such as India or those in South East Asia.

Basic Materials, Financials, Energy and Real Estate are the four most undervalued sectors in Asia, Siva said while presenting Credit Suisse's model Asian equities portfolio for 2012.

Credit Suisse, the financial services provider, announced a year-end target of 527 for the MSCI Asia ex-Japan Index. This represents an upside of 10% -15%. Siva said the year-end target took into account a 15% probability of a 2008-style financial crisis, a 25% probability of a "muddle through" scenario similar to that of the last few months and a 60% probability of a "mini 2009" in which quantitative easing by the European Central Bank helped to fuel a rally in equity markets.

Siva said that the price to book ratio for Asia Pacific ex-Japan had already fallen to 1.52 times, close to the 1.4 times level reached during the 2001 recession. She also noted that Asian balance sheets were strong, with the region's net debt to equity ratio having fallen to an expected 23% this year from a high of 47% in 1998.

On the equity investment implications of the macro environment, Siva said companies with a structural growth and return on equity story would be a natural choice for investors at the moment. That said, many well-known companies of this kind traded at a substantial premium to the rest of the region, and companies with a trend of rising return on equity were more attractive, she added. Siva suggested Keppel, COLI, Cheung Kong and TSMC as examples of stocks with rising return on equity, and said that Kia and Hyundai Motors also offered value! as thes e companies were gaining market share.

Siva also said she preferred "trough valuation stories," or stocks where the absolute price to book ratio is at the lows of 2008 or 2009, and which trade at a discount according to Credit Suisse's price to book versus return on equity valuation model. Stocks in this category include COLI, China Mobile, Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Hang Seng Bank, POSCO, Cheung Kong, UOB, Sun Hung Kai, Hyundai Heavy, BHP Billiton and Rio Tinto.

Noting on the impact of the euro-zone debt crisis on Asia, Siva said there has been a very strong correlation between increases in European banks' cost of short term funding and declines for Asian equities, and vice-versa. She said was a -0.89 correlation between Euribor spreads - the difference between the Euro interbank offered rate and overnight index swaps �C and the MSCI Asia ex-Japan Index.

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