Fundamentally we remain very optimistic about Asian equity returns in 2010, still forecasting a further 18% gains this year. Growth still looks good, with more upside to earnings in our view. Valuations look OK – in line with their own history, but attractive relative to other assets.
Within the country model we look at three factors: firstly, Valuation, secondly GDP growth and thirdly, Earnings momentum.
Indonesia, which we have been underweight since September, and has kept performing, we keep as underweight. In our models, the thing that keeps it neutral is short-term earnings momentum. This may persist. But from here to keep outperforming, this expensive market needs more currency appreciation and bond yields to keep falling. This looks less likely to us with inflation likely to trough and credit to pick up. We remain underweight.
Sales comment: So we are recommending underweight on Indonesia. Deconstructing the analysis, Indonesia ranks well on two of the three criteria outlined above: GDP growth and Earnings momentum.
Moreover, as we’ve argued earlier, the Indo analyst community will continue to revise up earnings to reflect a stronger currency and lower bond yield, so there is plenty of powder left so far as earnings are concerned.
Accordingly, it all comes down to the issue of Valuation: Indonesia ranks dead last on this metric:
Here’s the methodology:
“We rank all countries by their relative Price/Book compared to the market, and compare this to the average relative PB over the last three years.”
In our view, here’s what it comes down to: If you believe that comparing PB levels against historical PB levels is an appropriate method to determine whether the market is overvalued, then Indonesia looks expensive relative to the region.
If, however, you belief that a structural shift is occurring in Indonesia, resulting in ‘permanently’ lower inflation and interest rates, then you may choose to dismiss the historical PB metric as irrelevant.
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