More risk than return in 2009
We expect a low return, wide range year with further intra-year
downside because of significant macro challenges, optimistic earnings
expectations, and a difficult environment for valuation expansion.
Midyear, we expect more attractive entry levels.
Likely global challenges vs. local responses
The global economic environment remains difficult and the consensus
2H09 recovery might be delayed. We feel China has the best chance to
offset global stress with a coherent domestic policy response.
Earnings risks remain; valuations not at trough
We expect regional earnings to fall 15% to 35% (vs. consensus +5%);
Intra-year, P/B could breach 1X before recovering. If policy measures in
the US and China prove effective, significant upside is possible.
Overweight China; u/w KR, TW, AU
China is our sole overweight; we downgrade Korea, Taiwan and
Australia. We prefer large caps, China domestic demand and
infrastructure. Implementation strategies include China thematic
baskets, regional hedges, China vs. Korea options strategies,
overwriting, convertible bonds and stock screens.