Citigroup - Asia ex Strategy: Better Than Expected ≠ Good

The bull menu contains bigger EPS revisions, better economic numbers and plenty of liquidity — Earnings revisions have been worse than even during the Asian crisis but the cuts have been small. Economic numbers have come out worse than expected for the last 18 months but not for the last two months. This has given the market hope that the worst may be behind. However, better than expected does not mean out of the woods. There is plenty of excess liquidity due to the collapse of industrial production.

For the sceptics, export prices continue to tumble, EPS forecasts remain too high and volumes are weak — Export prices are off 4.1% yoy and are showing a steeper decline than during 1997/98. North Asian export prices continue to beat those of ASEAN. IBES EPS forecasts continue to suggest this is the 2nd shortest and 2nd shallowest recession ever in Asia ex. Export volumes are now falling faster than input costs. Additionally, the operating leverage is not in our favour.

At 1.5x P/BV ROE has been between 9.8%-10.7% and is forecast to be 8.4% — The only way one would pay 1.5x P/BV is if one views this is a shallow and short downturn and is willing to wait until 2010 to have confirmation of a 9.8%-10.7% ROE. Waiting for 20 months is too long in our view and nor is our long-term bull indicator turning upwards, suggesting a rally in a bear market, not a new bull market.