“Classic EM Risks” have re-emerged after robust inflows & trade surpluses
boosted Asia FX-reserves by 56% ($1.9trn) in the past 3 years. In 2012, we see
weaker DM demand & stronger domestic consumption weighing on current
accounts, while DM deleveraging is a risk to capital flows. Since August, FXreserves
fell 4-12% across much of Asia.
 Capacity pressure has also increased for banks, with LDRs up 4% &
loans/GDP already high in Asia. For 2012, we see 10% loan growth (the lowest
since ’08), and +13% EPS growth, half the pace of ‘10-11. On the other hand,
share prices reflect issues: Financials trailed MSCI AxJ by 200bps last year,
while P/B multiples de-rated from a peak of 1.7x to 1.2x.
 We find other reasons to be constructive, from (i) pricing power in SME &
consumer lending, to (ii) front-loaded fiscal stimulus (KO) & infra-spending
(PH/ID/MY), and (iii) falling inflation, which should benefit real incomes &
support further monetary policy easing across the region.
 Banks Positioning: Stay OW China as easing & fiscal stimulus push the NPL
cycle beyond 2012-13. ICBC/CCB anchor the portfolio, but we add CITIC/MSB
on leverage to easing & valuations (20%+ ROE, 1.1x FY11E). Stay OW
Philippines, as loan growth now +21% (Oct-11) & pricing power improving in
SME, favoring our position in MTB & the addition of Security Bk. OW
Thailand as stimulus/reserves allay fears around FDIF fees, flood-related NPLs.
 Pair Trades: We now favor HK (u/g to N) over SG banks (d/g to UW),
decelerating loan growth & rising provisions are risks to both, but capacity is
more stretched in SG. We also prefer Korea (N) over Taiwan (UW) despite
each showing NPL surprises in construction/shipbuilding & tech, respectively.
 India (d/g to N) has de-rated but macro risks are too high; structural CA deficits
+ fx reserves have been flat since Jan-08, while external borrowings have
doubled. Stay in Private Banks as NPLs rise (HDFC/ICICI/IIB). Indonesia
(UW) has potential for upside on 1H loan growth, but NIMs/credit quality keep
us –ve. Prefer BBCA (quality) & Danamon (provisions/capital/NIMs).
 Insurance Positioning: On the Life side, lower rates on long-duration assets is
a structural issue in Korea (N) & Taiwan (UW). In China (N), solvency margins
fell -55% the past 2 years, risking capital calls. OW AIA. For non-life, the
underwriting cycle still looks robust in Korea (OW).