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Small cap sector to rebound from trough valuations late in the fourth quarter of this year, according to UBS

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Speaking at UBS's Little Acorns Investor Day in Singapore, Head of the Regional Small Cap Research Team, David LEPPER, expressed greater confidence in both valuation levels and earnings estimates for the small cap sector although he also warned that it is likely to underperform the large cap sector in the near term.

"Following the third quarter earnings round, we believe we will be a lot closer to a trough in valuations than we were at the beginning of the year and that opportunities are likely to emerge. Markets offering the best potential upside include Singapore, Thailand, and the Philippines. However, each market has specific fundamental issues which will affect sentiment and we would expect many small cap investors to wait on the sidelines until greater clarity on macro issues, corporate governance and earnings momentum emerges,' noted Lepper.

"Improved asset turn has helped sustain profitability and has been supported by upgrades to estimates on the part of large cap analysts, with consensus growth being upgraded this year from 2% to 7%. In addition, small cap management have boosted the pay out of profits and demonstrated an increased risk aversion to debt in funding decisions," he added.

"Themes driving stock performance centre on corporate governance, the industrial cycle/raw materials and currency. However, we expect a greater focus on interest rates and earnings visibility to drive stock performance. During the Federal Reserve's last two tightening periods in the 1990s, small caps underperformed large caps. Despite being geared at a 15-year low, we believe this is likely to continue to be the case this time around. Based on our analysis of industrial trends in the early 1990s, it may be time to revisit the space and focus on a number of companies that exhibit strong management, earnings visibility, and that offer trough valuations.

"On a sector basis we favour basic materials, industrials and consumer cyclical and non-cyclicals, and are underweight banks and utilities. Within our top picks, we favour Southeast Asia and infrastructure. We also believe several domestic consumer counters offer attractive longer-term opportunities, as consumer confidence continues to return to the region," he said.

Singapore, 6 October 2005

Data (in %):

Zurich / Basel, 06 October 2005


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