>Ten for ’10: Top cyclical themes for 2010 (GOLDMAN SACHS)

Maintaining pro-cyclical bias in 2010 Our overall view of Asian cyclical stocks for 2010 is constructive, supported by our constructive view of the global/regional economies. Continuing growth in Asian economies is likely to be strengthened further by recovery in western economies. High operating leverage, boosted by structural cost reductions, is likely to boost earnings recovery as the cycle recovers. Our team is forecasting a 14% CAGR in sales over 2009-11 from the cyclical lows of 2009, helping a 53% growth in operating profit.

Key themes for 2010
There are three themes that underpin our regional stock picks: (1) bullish, out-of-consensus view on steel and lagging plays on commodities; (2) deeply discounted transportation sector; and (3) post-2H2009 rally, which stocks are not yet fully pricing in the expected recovery. That said, the margin for error has narrowed following the 2H2009 rally. A potential tightening in China may not change the underlying fundamentals, but could spook the markets. As such, stock-picking will become more important in 2010 and a stronger focus on valuations is warranted.

Our most actionable buys
Based on our 2010 themes, our ten best long ideas for 2010 are: Kawasaki Kisen, OOIL, EVA Air (all deeply discounted transportation stocks), JFE Steel, Kobe Steel, Yanzhou Coal, China Coal, China Shenhua (bullish metals/resources), GS E&C, IVRCL (valuations not yet pricing in recovery). We have also recently added FCC and THK to our Conviction Buy list; we also like JDC Moly, Itochu, Bajaj Auto, Wan Hai, Sumitomo Metal & Mining, and TSRC. These are all stocks that have a combination of company-specific attributes and attractive valuations – and stocks we would look to add to positions should there be any near-term weakness on perceived tightening in China and elsewhere.

Our least favorite ideas
We are cautious on selective machinery/capital goods names like Dongfang Elec, BHEL, Kawasaki Heavy; metal processors (Chalco, Nalco); auto suppliers (Cheng Shin Rubber, Toyota Boshoku); overvalued transport names (HMM, China Eastern); firms with uncertain outlook and generous valuations (Yunnan Chihong, Jiangxi Copper, Daewoo E&C).

To read the full report: ASIA CYCLICALS