Fishing Poles for Telcos Defensive Offense: Market drivers are changing - JP Morgan

We encourage EM benchmarked investors to increase weightings in Asian Telcos. The sector is well positioned to outperform during a period where a) EM stops underperforming, but b) overall markets may be weak as economic data softens. This report serves as a follow up to Fishing Poles for Telcos: What to buy during the correction...and the rally, as well as our recent equity strategy report Tricky Transit:

Perspectives and Portfolios.
OW Domestic Demand through Telcos: Telco Industry revenues are 99% correlated with consumption expenditure, while Telco stocks are 91% correlated to our Domestic Demand sector index. We recently began to close out the UW EM / OW DM trade, bringing EM back to Neutral from UW, and note that the rotation from domestics to exporters started to reverse in February. As a result we are now OW Domestic Demand plays in Asia. Key exposures are China Unicom, P.T.

Indosat, Advanced Info, and Tulip Telecom.
2Q10 again? Buy a Telco: Our global strategists are also concerned that while EM underperformance may be over, there is a risk of a repeat of 2Q10, when markets fell as economic data softened. As we’ve profiled before, Asian Telcos avoid around 1/3 of EM downdrafts, and sector dividend yields are close to all time highs. Key exposures (relative to domestic bond yields) are Chunghwa Telecom, AIS, Telstra, and Starhub.