Citigroup Asia ex Strategy (191009)

If You Can’t Find Absolute, Try Relative Revisions

 Absolute earnings revisions have peaked, but that does not preclude some countries and sectors doing better than others — Given that absolute revisions are the highest in 20 years, and that this was not the worst earnings decline in 20 years, we view that investors will increasingly turn to relative revisions. Only Korea and Taiwan are showing earnings revision outperformance, while the others all lag and are underperforming. Singapore looks as if it may be bottoming out.

 Technology, Consumer Discretionary and Materials are all outperforming in terms of EPS revisions — Industrials are not outperforming, nor is the Energy sector. Globally the Financials are showing signs of outperformance but not yet in Asia ex. The defensives are all significant earnings momentum underperformers, with the best among them being the Utilities sector. EPS momentum investors should be long Korea, Taiwan, Tech, Consumer Discretionary and Materials.

 Once earnings recover, market returns (sadly) slow — Expectations for 2010E market returns remain in the 25%-30% range, which we view as very high. Historically the second year of a market recovery is characterized by multiple compression not expansion. Most returns occur before earnings recover, thereafter expected to be between 9%-15%, and while this is still 2x-3x the compound return p.a. since 1990, it is sadly not as good as year to date.