Published: Friday August 3, 2012 MYT 11:51:00 AM
Updated: Friday August 3, 2012 MYT 11:52:29 AM
Asean markets range-bound in H2, says Morgan Stanley
KUALA LUMPUR: Asean markets are likely to be range-bound in the second half of 2012 (H2 2012) as Morgan Stanley Research loweredits earnings per share (EPS) growth outlook and increasing its bear scenario weightings.
In its Asean Equity strategy report issued on Friday, it said while Asean's potential structural investment-led growth story remained intact "but we believe that several factors increase the potential vulnerability of these markets in H2 2012".
It cited high relative ownership levels, trailing outperformance, high expectations, and recent downgrades by its global and Asean economists.
Describing Asean markets as relatively resilient, it also noted they were not immune to further slowdown in global growth. In fact, lagged impact of prolonged developed market slowdown was likely to be a negative factor.
"Although we think Asean's medium-term structural investment-led growth story remains probable, we believe that high relative ownership levels, trailing outperformance and high expectations increase the potential vulnerability of Asean markets in H2, 2012," it said.
Morgan Stanley Research expected Asean markets to likely be range-bound and volatile during the second half of the year.
"We are increasing our bear scenario weightings across the Asean markets because lower global growth trajectory will further increase volatility on account of policy errors, if any," it said.
Morgan Stanley Research said its new scenario-weighted index targets for YE2012 implied 6% downside for MSCI Singapore, flat performance for MSCI Indonesia and 6% upside to MSCI Thailand.
It pointed out Thailand remained its most preferred market as it was likely to be relatively immune to global growth shocks as the government executes its fiscal stimulus-led growth.
"Despite the relative resilience, Thailand has underperformed MSCI SEA by 4.0% since March 2012. We believe rise in political volatility has weighed on Thailand's performance in the recent past. Thailand's cyclical fiscal stimulus-led growth prospects combined with stable global growth, benign political environment and supportive valuations should drive markets through 2012," it said.
The research house added that in its base scenario, it expected MSCI Thailand to deliver an EPS CAGR of 15.9% during 2011 to 2013 and assume a 5.4% PE premium to the last two-year average forward PE.
MSCI Thailand (US$) index implied a 13.8% upside from the current levels through December 2012.
"In our scenario-weighted index target, we now assign a probability to Bear scenario of 20% versus 15% for Bull scenario (fatter tail risk compared to other Asean 3 markets). Our scenario-weighted index target implies 6.2% upside to from the current levels," it said.
As for Indonesia, Morgan Stanley Research acknowledged the country's structural story would continue to be driven by strong demographic-led domestic demand combined with infrastructure and capacity expansion-led investment cycle.
"Although Indonesia's earnings are likely to be relatively defensive, our earlier constructive view on Indonesian equity markets was driven by a combination of sustainable high RoE, investment-led growth and falling equity risk premiums. Reduction in currency volatility has been one of the important drivers for reduction in Indonesia's equity risk premiums during the last few years.
"However, high commodity and external capital linkages could increase the volatility of IDR, thus increasing equity risk premiums and affecting valuations negatively. Hence, volatility in Indonesian equity markets could be high, but we would use this volatility as another entry opportunity," it added.
Morgan Stanley Research said it its base scenario, it expected MSCI Indonesia to deliver an EPS CAGR 9.0%of during C2011-13E. MSCI Indonesia (US$) index implied 7.3% upside from current levels through December 2012.
"In our scenario-weighted index target, we now assign a higher probability of 20% to our Bear scenario versus 5% for the Bull scenario. Our scenario-weighted index target implies 0.3% downside from current levels," it said.
It downgraded Indonesia to neutral from positive, citing potentially higher currency volatility due to widening current account deficit was likely to cap valuations, despite the relatively resilient domestic earnings.
As for Singapore, it said it remained our least preferred market. A prolonged global growth slowdown would constrain its earnings and valuations.
It said Singapore has been the best performing ASEAN 3 market year-to-date, following a -11.7% performance against MSCI SEA in 2011.
Investors consider Singapore as a relative safe haven (despite its high earnings volatility) due to dividend protection, excellent corporate governance, relatively low political and policy risk, healthy banking system and cash-generating global/regional businesses which have been managed well through various economic cycles.
"We agree with the relatively defensive nature of Singapore and hence it would be our most preferred market in a bear scenario," it said.
However, considering the recent downgrades to Global GDP growth forecast for both H2 C12 and C13 it said it was likely that Singapore may enter a cycle of earning downgrades in H2C12.
"Potential earning downgrades combined with strong trailing performance drives our cautious view on the market. We recommend booking profits in Singapore and continuing to play the defensive dividend yield strategy," it added.
Morgan Stanley Research said in its scenario-weighted index target, it assigned a higher 20% probability to its Bear scenario versus 5% to its Bull scenario. Its scenario-weighted index target implied 5.7% downside from current levels.