Citigroup Asia ex Japan equity strategy

What’s In The Price, What’s Not and Where To Next?

Markets have achieved in 10 weeks what normally takes 24 months — Post each recovery since 1975, it has taken 2 years for P/BV to hit 1.7x. Not this time, 10 weeks is all it took. 1.7x P/BV usually gives an 11-12% ROE, which is due to arrive end-2010 according to IBES. If it does, this will have been the 2nd shortest and 2nd shallowest earnings recession in Asia ex since 1975. We hope IBES is right!

Taiwan, Thailand and HK. Banks, tech and telecoms. All offer value — Taiwan, banks and technology remain consensus Underweights, but we continue to be contrarian Overweights. Korea is the other consensus Underweight. Telecoms, consumers and materials are all well held, and the latter two are now trading above mean valuations.

Liquidity aplenty, most funds still underperforming — The pain trade in March was up with investors being too defensive. As of last week, between 30-40% of funds are beating the market, and the bears want to see more outperformance before reversing course. Consensus expectation for a 5-10% correction will unlikely happen. If a correction happens, we expect it will be 20-30% with an increasingly unfavorable risk reward.