20130903-DBS_Group-Market_update_Long___short_ideas_from_current_headwinds_25页_349kb

Document Summary

Core Content

This document provides an analysis of the Chinese and Hong Kong equity markets as of 2 September 2013, focusing on the impact of global uncertainties, such as the potential US military intervention in Syria, the Federal Reserve's QE tapering, and regional economic conditions. It also outlines investment recommendations, emphasizing the resilience of China/HK equities despite these headwinds.

Main Views and Key Information

Market Resilience in China/HK Equities

• Despite global uncertainties, including the potential for US military action in Syria and the Fed's possible QE tapering, China/HK equities are expected to remain resilient due to continued improvement in China's PMI data.
• The Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI) are upgraded with year-end 2013 targets increased by 2% to 23,250 and 10,900 respectively, reflecting improved earnings forecasts.

Investment Recommendations

• Add exposure to large-cap H-shares: PetroChina, ICBC, and CCB are highlighted as attractive options.
• Yield plays are now more appealing: REITs and other yield stocks have underperformed since late May, but some are now considered attractive with yield protection and potential for recovery.
  • Hutchison Telecom is recommended as a top yield play with a yield of ~6% and potential for significant upside due to the shift from 3G to 4G.
• Revisit under-owned Chinese banks: Investors should cover shorts in under-owned Chinese banks and replace them with regional financials and structural losers in the industrial/material sector.

Sector Adjustments

• Overweight sectors: Gaming, Auto manufacturers, Chinese telecoms, and oil & gas.
• Underweight sectors: Regional financials, India and Southeast Asian economies, and some industrial/material names like China Coal and Shanshui Cement.
• Top 5 picks include:
  • China Everbright Intl
  • China Resources Ent
  • China Unicom (T5)
  • Country Garden
  • PetroChina

Performance and Valuation Highlights

• The HSI and HSCEI are undervalued historically, with attractive price-to-earnings (PE) and price-to-book (PB) ratios.
• PetroChina is noted as a top pick due to its strong fundamentals, natural gas reform, and improved refining margins.
• HSCEI has underperformed significantly YTD (-12.1%), but the outlook remains positive.

Regional Economic Outlook

• Regional currencies have shown some stabilization, but emerging markets face ongoing fragility.
• India and Southeast Asia are expected to experience sub-trend growth, increasing the risk of underperformance.
• The Indonesian rupiah has been supported by interest rate hikes, but concerns about trade deficits persist.

Syrian Uncertainties

• Tensions in Syria have eased slightly after the US delayed military action, but the situation remains uncertain.
• The potential for US military intervention could lead to short-term market volatility, but the China/HK markets are expected to recover quickly if oil supply remains stable.

Earnings Revisions

• Several sectors have seen improved earnings forecasts, with a 2% average increase for FY13 and no change for FY14.
• Banking and Finance (China) and Auto manufacturers & dealers have revised earnings upward.
• Chemicals and Banking and Finance (HK) have seen downward revisions, reflecting weaker performance.

Key Investment Actions

• Add market exposure: Focus on large-cap H-shares like PetroChina, ICBC, and CCB.
• Rebalance short positions: Cover shorts in under-owned Chinese banks and replace with regional financials and industrial/material losers.
• Revisit yield plays: Consider REITs and other yield stocks, especially those with strong yield protection and potential for recovery.
• Take profits on mid-cap outperformers: Mid-cap stocks that have outperformed YTD may be trimmed.

Conclusion

The document highlights the resilience of China/HK equities amid global uncertainties and recommends a strategic shift in portfolio allocations. It suggests focusing on large-cap H-shares, particularly PetroChina and Hutchison Telecom, while maintaining a diversified approach and adjusting short positions in response to regional economic volatility.