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UBS forecasts another strong year for Asian equity markets
Earnings per share (EPS) growth and a peak in Asian interest rates will be the primary engines for Asia ex-Japan equities in 2007, according to UBS. The financials, materials, energy and technology sectors are singled out as offering particularly attractive valuations.
"The Fed tightening is now largely priced into Asian markets and we continue to look for markets with the potential to rise in line with UBS's bottom-up expectations of 15% EPS growth this year. Furthermore, we believe the forecast is conservative as it is not based on the premise of an increase in PE (price/earnings) multiples,"noted Sakthi SIVA, Head of Asian Equities Research Strategy at UBS.
While a re-rating in P/E multiples and the possibility of "Asia outperforming in an emerging market context" are cited as offering potential upside, UBS warns that a tactical correction, a recession in the US, an increase in oil prices, and a hard landing for the Chinese economy all represent serious risks. Of the four, a tactical correction is the major concern."
With the exception of China and India, Asian interest rates have already peaked, believes Siva, who expects Thailand and Korea to post the biggest rate declines in the region.
In terms of sector, financials, materials, energy and technology are all ranked 'overweight' on the basis that they retain attractive valuations and, collectively, have upgraded EPS. With a relatively low exposure to the US, financials are particularly favored although a distinction is made between those trading at low P/BV (price-to-book valuation), such as Thai banks, and those trading at a relative peak such as Chinese insurers. The overweight recommendations for materials, energy and technology are based on large valuation discounts. Korean Tech, particularly Samsung Electronics, with the current P/BV at 2.1x book value, looks more attractive than Taiwan Tech, which rose from 2x book in June 2006 to the current 2.4x. The bank remains cautious towards commodities.
Country-wise, China, Korea, Thailand and Taiwan are all ranked 'overweight'. In the case of Taiwan, a reversal in valuations, capex-to-sales, free cash flow yield and interest cover are all deemed as likely to help reverse the last eight years of underperformance.
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