>Alpha Strategy (BNP PARIBAS)

Index targets raised on EPS turnaround

• We are raising our country index targets by 23% and increasing Taiwan,India and Indonesia to Overweight.
  

• Future EPS expansion in markets following 6 months of PE multiple expansion is the main driver of the upgrade.
  

• Asian markets are benefiting from substantial capital inflows as investor risk appetite increase as signaled by VIX, VDAX and the KIX. Risk of a short-term correction remains, but substantial cash waiting on the sidelines implies correction will be shallow.

Earnings turnaround
The key change in our assumptions, which has resulted in across the board increases in our index targets, is the revised outlook for earnings. Regular readers will be familiar with the Fair Value Earnings Model (FVEM), which we introduced in the Nov 2008 Alpha Strategy report – see appendix for model explanation. Data from the model highlights a dramatic change in the
market’s expectations for earnings. As recently as February, the model signaled a 10% contraction in 2009 EPS, which was in line with consensus. This has now changed to an implied 24% growth for 2009 EPS as of the end of April and compares to consensus EPS forecasts of an 11% contraction.

Earnings expansion takes over from multiple expansion
The past six months have been characterized by multiple expansion, as reflected by the current PE multiple for Taiwan, which is trading on 40x 2009 EPS forecasts. The next six months will be characterized by market expectations for increased earnings forecasts. Initially this will be through an improvement in the second derivative – the earnings revision index and the ratio of earnings upgrades to downgrades; however, it will eventually give way to an increase in actual earnings.

To see full report: ALPHA STRATEGY