>ASIA EX STRATEGY (CITI)

Markets Up, EPS Revisions Up

■ Markets have risen and earnings have been revised up — Back in early 2009 earnings revisions were the most bearish since 1990. In many cases we are now back above the average and heading towards the upper end of the post 1990 range. In March 2009 the risk was upside surprise, but increasingly the risk is downside surprise. Australia and Singapore have seen the least earnings revisions, Indonesia, Korea and Taiwan the most.

■ IBES forecast for 2009 is for a 5% decline and then a 30% increase in 2010 — Excluding the 1980’s cycle, which culminated in the 1987 crash, it takes on average 17 months for earnings to go from trough to prior peaks. Once the old peak is reached, the average P/BV has been 1.8x. We are currently on 1.8x P/BV, the 10-year and 30-year average, so we ask ourselves are these average times?

■ Terms of trade are worsening again and exports need to grow 48% to reach prior peak — The rise in commodity input costs has increased downside pressure on corporate profitability, a distinct change from Q4 of 2008. Without sharp improvements in exports, i.e. volume, we view the risk to earnings is to the downside for the manufacturing sector.

■ With P/BV at the same multiple historically seen two years post the recovery, the risk reward is fading — Markets have discounted further than in any prior cycles. On its current trajectory the MXASJ will have recaptured the 2007 peak by Christmas of 2009, a fantastic wish but not one we’re sure we’ll get.

To see full report: ASIA EX STRATEGY