>INFLATION OR DEFLATION WHICH WAY IS ASIA HEADED? (CUSHMAN AND WAKEFIELD)

A REPORT ON THE ASIA PACIFIC ECONOMY & ITS IMPACT ON COMMERCIAL REAL ESTATE

Young populations and low debt levels enhance long-term real estate investment opportunities in many asian countries

A logical strategy
The current debate raging is whether we are headed for inflation. And if so, what will be the effect on commercial real estate prices? Recent Government and central bank actions have resulted in unusual monetary and fiscal policies ranging from quantitative easing in the UK, ‘cash for clunkers’ in the USA and very large bank loans in China. Some view these policies, put in place since the credit crunch hit a year ago with the collapse of Lehmann, as being inflationary. Others argue that with output running at well below capacity, inflation is impossible, and deflation is the more likely scenario. Here we separate out consumer price inflation from asset-price inflation, and discuss that in the medium- to longer term, inflation is the more likely scenario for Asia, not including Japan. This goes to show that investing in certain Asian real estate asset markets remains a logical strategy in the present economy.

Figuring out where we stand
Consumer price indexes are currently low in most Asian countries, as demand and prices of things like commodities have fallen along with global GDP output. Real estate asset prices are falling as the availability of debt is curtailed, leading to a shifting of yields upwards. Governments across the globe are printing and spending money in an effort to restart credit flows put a floor under falling asset prices and boost consumer demand. But what will happen next in Asia? Generally there are two schools of thought:

1.Printing and spending money will prove to be inflationary and in high 1. inflationary times one should not hold cash, but rather real assets including real estate.

2. We are in a deflationary period and prices will continue to fall, as demand is far below the global economy’s output capacity. In a deflationary period, it is better to hold cash, as you will be able to get a better deal tomorrow.

In order to prop up weak economies and put cash back into the seized banking system, governments and central banks have introduced regimes of increasing money supply with exceptionally low interest rates, for example in the USA and UK. Usually, low interest rates:

1. Drive investors to put money into assets - and that includes real estate – compressing yields. The opportunity cost of holding savings is reduced, pushing investors to buy assets.

2. Drive down the value of the currency against other currencies.

3. Are linked to increasing money supply, which can have an inflationary effect on goods and services.

An easy way to see the interconnection of these three points is to think about the prices of money1.

1. The price of money relative to time --> interest rates
2. The price of money relative to foreign currency --> exchange rates
3. The price of money relative to all goods and services --> inflation rates

To see the full report: ASIA PACIFIC ECONOMY

>QE Sep-09 Earnings Season thus Far (MORGAN STANLEY)

Quick Comment: So far, eight companies in our coverage universe have reported results. Aggregate earnings are up 13% YoY, a tad ahead of our analyst expectations of 12%. In terms of surprise breadth, three of these eight companies reported net profit that exceeded expectations by 5% or more, while two trailed our expectations by 5% or less (see page 2 for company-wise details). Four companies in the BSE Sensex have reported 20% growth in earnings, ahead of
MS analysts’ expectations of 15% growth. It is still early days to analyze the earnings at the sector level. Nevertheless, Industrials is the best-performing sector while Materials is the worst-performing sector in terms of profit growth thus far.

EBITDA Margins Rise: EBITDA margins for the sample are up 3.5ppt. Excluding the materials sector, EBITDA margins are up 4.3ppt. Out of the four sectors that have reported earnings, three have seen margin expansion, with Industrials leading the list. Revenue growth for the sample is up 8% YoY and for the Sensex companies it is up 4%.

Broader Market Earnings Lead the Narrow Market: So far, 212 companies have reported. Aggregate earnings for the broad market are up 24%. The sharp recovery in margins, up 5.8ppt YoY, is the key driver for the strong earnings growth. However, revenues for the sample are up 4% YoY. Of these 212 companies, only 31 companies or 15% have reported losses for the quarter while almost 30% or 62 companies have reported earnings growth in excess of 50% for the quarter ended June 2009. We maintain our view that earnings are likely to surprise on the upside, ahead of our analyst expectations (as has been the case for the past two quarters) with the broader market outpacing the narrow market in terms of growth.

To see the full report: INDIA STRATEGY

>US Q3 results: feel the beat (HSBC)

■ With a third of the S&P 500’s market cap having now reported, we find that the season is coming in significantly ahead of analysts’ expectations

■ 78% of companies have beaten on the bottom line, many by a wide margin; moreover, we are now seeing more top-line surprises emerging with beats here outnumbering misses by a factor of two-to-one

■ The positive news is broad-based, but technology is the standout sector, with a hugely impressive 90% of companies beating on the EPS line and 95% beating on the sales line

The US Q3 results season has so far significantly exceeded market expectations. With 35% of the S&P 500’s market cap having now reported (through Wednesday 21 October), our analysis shows that 78% of the constituent companies have provided a positive EPS surprise in the third quarter and only 12% have missed (remember on average 60% beat expectations and 20% miss).

However, it’s not just the number of companies beating expectations that has impressed, but also the magnitude of the beat – we estimate a positive EPS surprise of 21% for the S&P 500 index. And even if we exclude the volatile financials sector (where the EPS surprise stands at a huge +224%) we still get an impressive EPS surprise +12%. If we combine the figures from the companies that have reported with the consensus forecasts of those still to report, we arrive at a ‘blended’ growth rate of -23%. Note, Q3 will be the ninth consecutive quarter where EPS growth has been negative, but it is almost certain to be the last in the current cycle, with the rate set to turn sharply positive in Q4.

So what about sales? Isn’t aggressive cost-cutting the only reason companies are beating? No, is the short answer. Our analysis shows that 59% of companies have also beaten sales expectations and these have outnumbered the number missing by a factor of two-to-one.

The fact that we are now getting more upside surprises coming through at the top line is reassuringly positive for the earnings outlook and we see no reason to change our view (recently set out in Equity Insights Quarterly: upgrade cycle to continue, 6 October 2009) that the earnings upgrade cycle has further to run and that consensus expectations for 2010 earnings are too low.

We are maintaining our pro-market view and we stay pro-beta at both the regional and sector levels.

To see the full report: EQUITY INSIGHTS

>FUNDAMENTAL ANALYSIS ON CEMENT SECTOR

CEMENT INDUSTRY
■ India is the world’s second largest producer of cement after China with industry capacity of over 200 million tonnes (MT)

■ Total installed capacity was 204.29 MT as on August 31, 2008

■ Total despatches has been 100.17 MT during April–October 2008–09 100.96 MT during April–October 2008–09.

CEMENT INDUSTRY ANALYSIS
■ India’s cement consumption grew 9.6% yoy.
■ South market witnessed strong demand supporting firm pricing (up 4.7% yoy) in the region.
■ The key concern dip in construction and infrastructure activities in the country.
■ Contradictory pricing trend emerge; realizations remained robust in South
■ Capacity utilization improves MoM but remains lower yoy
■ Key performers were players who have recently added capacities
■ Coal prices cool from peak; freight index fell to the lowest levels since 2002.

To see the full report: CEMENT SECTOR