Monday, March 26, 2012

>PORTFOLIO STRATEGY: 2Q consolidation: Expect flat market, cyclical rotation

■ Expect flat market for 2Q, rotation out of global themes
A period of consolidation is likely after the region’s 14% ytd gain; we expect flat returns in 2Q (+2%). Performance will likely be driven by the interplay between macro newsflow and expectations. We expect market leadership to rotate out of global cyclicals back to domestic themes.

■ Allocations: restack driven by shifting risk/reward
We retain our overweight stance on China, but expect a bumpy period in the very near term until clearer signs of policy easing emerge. We raise Indonesia to overweight and India to market weight (“domestic” theme). We upgrade Australia to market weight; we may be early, but expect a cyclical upturn later this year and find valuations attractive. Hong Kong and Malaysia are underweight on valuation and a lack of catalysts. We are market weight Japan on a 12m view but see near-term outperformance.

■ Stock correlations falling: focus on relative value ideas
We emphasize relative trade ideas given falling intraregional stock correlations and a potential period of consolidation. Ideas include inexpensive ASEAN stocks vs. expensive cyclicals, banks vs. property, and tech hardware vs. semiconductors.

■ Positive strategic stance: higher 12-month target
Our 525 MXAPJ 12m index target equates to roughly 12x our 2013 EPS forecast of $44 and implies 19% upside from current levels. Our positive strategic view is driven by a recovery in EPS growth to 9% and 15% (in local fx terms) for 2012-13 and a moderate improvement in valuation from still inexpensive levels (11.4x forward P/E, 1.5x trailing book).

To read full report: PORTFOLIO STRATEGY