Concerns about Euro area financial stability have flared up, China growth
data have disappointed, and US data remain lackluster. Asian equities have
responded by falling 10% from early May highs in just two weeks.
Near-term outlook has degraded
It is hard to identify catalysts for a sustained recovery in equities in the
short run. Greek elections and the next China macro data are a month
away, so uncertainty over the integrity of the euro or China’s growth path
are likely to persist at least until then.
We hew to domestic themes, emphasize more defensive posture
Our four thematic recommendations for the current environment are 1)
domestic vs. global cyclicals; 2) ‘inexpensive’ ASEAN vs. ‘overvalued’
cyclicals; 3) strong vs. weak balance sheets; and 4) secure, high dividend
yield stocks. Our preferred downside hedge: KOSPI200 95/85% put spreads.
Lower 3m target; retain positive strategic stance
We lower our 3m MXAPJ index target to 410 from 450, which implies only
a moderate rebound from current, technically ‘oversold’ levels. We have
not changed our 525 12m target, which implies 30% upside and embeds
expectations of 10% and 15% regional EPS growth for 2012/13 and a
moderate recovery in valuations from 10.3x to 11.6x forward 12m earnings.
Defense, then offense
Much like the well-known ‘rope-a-dope’ defensive strategy that
Muhammad Ali employed in his ‘Rumble in the Jungle’ fight with George
Foreman in Zaire in 1974, investors need to weather near-term macro
uncertainties in order to benefit from the potential recovery in equity prices
that are consonant with our base-case macro forecasts.