20160817-高盛-Probing_the_liquidity-driven_upside_case_Large_cap_laggards,_secure_high_yielders,_short_squeeze_candidates_16页_1mb

Asia Pacific Equity Market Summary

Core Content

The Asia Pacific equity markets have experienced a rally driven primarily by favorable liquidity conditions, despite weak earnings growth. This analysis explores the potential for further upside in the MXAPJ index, focusing on three key investment ideas: large-cap laggards, secure high yield stocks, and short squeeze candidates. It also examines the role of foreign fund flows, the shift in the Fed's reaction function, and the valuation dynamics of equities in the region.

Main Points

• Liquidity-Driven Rally: Asian equity markets have risen significantly post-Brexit due to increased foreign inflows and a search for yield, even though earnings growth remains subdued.
• Favorable Liquidity Outlook: The market remains relaxed about potential Fed rate hikes, with the Fed funds futures market pricing in a 51% chance of a hike by December and a 76% chance by year-end. This suggests that the favorable liquidity environment may persist.
• Active Fund Under-Exposure: Active funds have been under-exposed due to high cash ratios and defensive positioning, potentially leading to increased equity exposure in the near-term.
• Potential Upside: Based on flow and valuation analysis, the MXAPJ index could see a c.5-10% further rally if liquidity conditions remain supportive.
• Valuation Dynamics: While valuations have risen, the low yield environment supports higher equity multiples. A narrowing of the equity-bond yield spread to a 5-year low could imply a 15X P/E multiple, suggesting a 12% upside.

Key Investment Ideas

1. Large Cap Laggards

• These stocks have underperformed the broader market and are relatively under-owned.
• They are likely to benefit from continued passive inflows, which favor large index constituents.
• Criteria include market cap > US$5bn, 6-month average trading volume > US$5mn, underperformance vs. MXAPJ, and being in a Buy-rated category.
• Example stocks include Baidu (BIDU UW), Ping An Insurance (2318 HK), and LG Chem (051910 KP).

2. Secure High Yield Stocks

• High yield stocks are favored due to the 'search for income' theme.
• These stocks are less likely to cut dividends and are more resilient in a low-rate environment.
• Criteria include high and sustainable dividend yields, low risk of dividend cuts, and strong earnings growth.
• Example stocks include Mapletree Commercial Trust (MCT SP), Longfor Properties (960 HK), and Far East Horizon (3360 HK).

3. Short Squeeze Candidates

• Stocks that are heavily shorted could see a rally if the shorting pressure is reversed.
• These are typically undervalued or have strong fundamentals that may attract buying interest.
• The analysis suggests that such stocks may benefit from a shift in investor sentiment.

Sector Changes

• Upgrade Insurance (OW): The sector has a high proportion of index heavyweights and high yield stocks. It has lagged the MXAPJ by 12% ytd and may benefit from a relief rally.
• Upgrade Tech Hardware (MW): Strong performance and high dividend yields make this sector attractive.
• Downgrade Healthcare (MW): Expensive valuations and low beta/yield make it less appealing.
• Downgrade Capital Goods (UW): Relatively higher Europe revenue exposure and low dividend yield reduce its appeal.

Valuation and Growth

• The MXAPJ index has risen 13% since the post-Brexit low, but earnings growth for 1H16 is -2% yoy, below the typical 1H run rate.
• The forward P/E multiple has expanded to 13.7x, which is 0.7 s.d. above the 10-year mean.
• A narrowing of the equity-bond yield spread to a 5-year low could imply a 15X P/E multiple, suggesting a 12% upside.
• The implied cost of equity (ICOE) has decreased to 10.0%, which is 1.3 s.d. below the 15-year range. A further decrease to 9.5% could imply a 11% upside for the index.

Conclusion

The Asia Pacific equity market is currently supported by favorable liquidity conditions, which are expected to persist if the Fed maintains a dovish stance. This presents an opportunity for further upside, particularly for large-cap laggards, secure high yield stocks, and short squeeze candidates. The analysis also suggests that active funds may increase their exposure as the rally continues, and that sector rotation towards higher beta and yield sectors like Insurance and Tech Hardware is warranted.