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Minggu, 19 Juni 2011

Q Strategy Help in EM: A guide to stock selection in Emerging Markets - Revised - JPM

· In this report, we combine our macro strategy with a quantitative screening tool to guide stock selection in emerging markets.
· The quantitative tool uses the J.P. Morgan Q-score developed by Steve Malin and J.P. Morgan’s quant team.
· The J.P. Morgan Q-Score provides an indication of a company’s expected return versus both its country peers and its regional industry peers using a balanced multi-factor quantitative approach. The goal is to bias stock selection towards cheap, successful, quality companies with solid earnings, and away from expensive, poor quality, unsuccessful companies with poor earnings. The higher the company scores, the higher the expected return (or Alpha) relative to the considered universe.
· Currently cyclical factors are more dominant than longer-term themes. We are excluding cyclical stocks and exposure to Chinese property and construction (highlighted in red in Table 1). As macro growth slows, cyclical stocks appear cheap prior to the inevitable earnings downgrade. The resultant top 5 stocks combining Q-scores and top-down macro strategy are: Charoen Pokphand, Bank Rakyat Indonesia, President Chain Store, Bank of China, and Siam Commercial Bank.
· Top 5 stocks with the highest overall Q-score: HTC, KGHM, GCL Poly Energy, China National Building Material and Anhui Conch Cement.

Latest Strategy Reports

Diminishing Fears: Tracking Inflation in Emerging Markets - This report tracks inflation in EM and Asia. We caution investors in attempting to extrapolate market returns from previous cycles. Many emerging economies have not had a full growth inflation cycle since their current account crisis. The global financial crises ended the 2007/8 tightening cycle abruptly. J.P. Morgan’s base case on growth and oil prices is an uncomfortable combination of oil at US$130 with weak growth. Our hope is that the new information for commodity markets is weak demand resulting in lower prices. If forecast headline inflation slows with growth, our bearish view on markets could change in 2H11.

China 2020 – 130 million swing - The number of graduates in China has increased by 74 million in past decade (2010 Census). The tertiary enrolment ratio is now 35%. This combined with a 2% decline in the working age population leads to a 91 million fall in non-graduates in the workforce; it grew by 28 million in 2000-2010. We believe that this is the most important driver of reduce fixed asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. Continuing the current investment-driven model will be inflationary.

Key Trades and Risks – Emerging Markets Equity Strategy - Our strategy is defensive. Economic data continues to disappoint. This is gradually being discounted with the underperformance of cyclical sectors. The key asset allocation calls remain UW commodities/energy and exporters; with UW Brazil, Russia, Korea and Mexico. The maturing of QE2, Euro sovereign stress and large bearish dollar positions increase the risk of a reversal in the dollar index. For fear of dropping into the intellectual vacuum of the ‘risk-on-risk-off’ trade, a strengthening DXY is associated with weaker commodities and equities. A weak Euro threatens our CE3 OW; we are downgrading to neutral. In Turkey, high inflation, deteriorating current account deficit and relatively complacent policy worries us. The hikes in reserve ratio requirements (RRR) have cut consensus earnings forecasts for banks. We are downgrading Turkey to UW from OW. We do not expect our OW markets to make positive absolute returns soon. The end of the derating phase is typically marked by a reduction in inflation fears that follows weaker economic data. Inflation pressures in ASEAN in our view are less severe arguing for outperformance.

A May Of Worries: Emerging Equity Markets Monthly Wrap-May 2011: Market momentum was weak in May. MSCI EM declined 3%, underperforming MSCI World by a marginal 0.6% driven by poor economic data, Euro sovereign debt concerns, maturing of QE2 and antiinflation policies in EM. • EM Asia (-2%) was the best performing sub-region outperforming MSCI EM by 1%. MSCI EMEA declined 6% underperforming EM by 3% on the back of a weak Euro. Egypt (+10%), Colombia (+2%) and Peru (+1%) were the top three markets. Turkey (-13%), Hungary (-8%) and Russia (-8%) were the worst performers.

Winners over the Cycle: Review of EM Stock Returns from January 2003 - This report reviews the return of emerging market equities over the economic period (2003 to 2010). Our sample set is constituents of MSCI EM as of January 2003 with a trading volume in excess of US$5M (299 stocks), key Russian stocks plus large stocks listed in 2003 and Chinese banks listed between 2003-10. The return analysis is total return (dividends reinvested) in local currency. In addition to simple CAGR we also calculate the volatility adjusted return.

EM equities and Oil: What happened in 2008? - In this note, we do a quick review of the performance of emerging market equities during periods of sharp oil price movements in 2008. The speed at which events in Tunisia have led to political changes in other countries have taken most by surprise. Most of MSCI EM are democracies but there are some notable exceptions. Events in Libya are another reason to delay returning to Emerging Markets.

The Fastest Fall – 3rd Encore: Emerging Markets Equity Strategy: - MSCI Emerging Market is now down 7% since its recent high on 1165. A typical EM correction is 15-20%; assuming this then the buy zone is below 990. In this report we revisit the historical corrections in emerging equities and put the current correction into perspective.

The Inflation Threat – Inflation and EM equity markets: In this report we study the trend in inflation and interest rates in EM. The objective is to identify markets that are most vulnerable to changes in interest rate expectations.

Monetary Policy Cycles in EM: Emerging Markets Equity Strategy Guidebook:- In this report we describe the various monetary cycles in Emerging markets and developed Asia. As is the case with this type of analysis, the time period and cycles can only provide a guide for emerging markets, rather than generate a statistically significant conclusion. Equity markets typically fall prior to the first increase in interest rates as central banks normalize policy. These periods of policy-speculation have been buying opportunities in most cases. But investors must check the trend in inflation; if this is rising toward central bank target zones markets are likely to fall.

Emerging Equity Market Year Ahead - Stocks for 2011:- Both J.P. Morgan equity research analysts and our macroeconomic team have been involved in the production of this document. The process started with the Strategy Team briefing analysts on our key themes and macroeconomic forecasts for 2011. Analysts then reviewed their earnings models and presented their top picks and stocks to avoid to both their sector and country strategists. The sector and country teams then produced their list of top long and short ideas. These ideas form the core of this document.

Rotation revisited - Filtering for growth that was caught in 4Q10 rotation: - This report lists 22 stocks with a growth track record that underperformed MSCI EM in 4Q10.

Weighed down by the BRICs - Review of 2010 for Emerging Equity Investors: - This report provides a review of 2010 with capital returns in Emerging Markets. This report is also available with total returns.

Home of their own for 1.3 billion: Understanding Chinese housing data: - The goal of this report is to explain the property data available in China. Our aim is to provide a context to help investors and macro observers.

Q Strategy Help in EM – A guide to stock selection in Emerging Markets: - In this report, we combine our macro strategy with a quantitative screening tool to guide stock selection in emerging markets.

Herd Instinct
This weekly summarizes the Global Fund Flows into major Emerging Markets and Developed Asia as well as US Mutual Fund Flow subscriptions into Global and Regional Funds.

Welcoming the weakness - Perspectives and Portfolios: Weak economic data and anti-inflation policies continue to drive our cautious view on markets. The declaration in developed economies’ final demand is disturbing. It is not too late to move underweight cyclicals. We are more bearish on China’s economy post our conference. Property sales are weak in a year of strong supply growth. Developers are offering discounts to encourage cash buyers. Higher inventories should lead to further price falls. This we would view as bullish, as it would signal policy success. Remember in the 2007/8 tightening period, cars, steel, cement and residential construction starts did eventually decline.

Mayday! Or not: Asia Pacific ex Japan Monthly Wrap – May 2011 - MSCI APxJ performed inline with MSCI AC World in May. Absolute returns were negative for all APxJ markets except Indonesia and New Zealand. The maturing of QE2, slowing global growth, euro sovereign stress, inflation and the policy response were the key concerns. The modest decline in equity markets relative to commodities is notable. This reflects rotation out of cyclicals into domestic names plus that net risk positions are modest. The top three Asian markets in US dollars were Indonesia, Hong Kong and China. Australia, Philippines and India were the worst performers in May

Greek contagion in Asia: Stress testing companies with European exposure: In this report we stress-test Asian companies with European exposure. The stress test is the first order impact of these assumptions: 1) Euro at parity to the US dollar (spot 1.26). 2) Double dip in European economy. 3) Oil to dip to $60 by 2010 end. Based on today’s data these assumptions are extreme. Data for core Europe is improving, partly due to the weak euro; note the strength in French, German and Italian PMIs plus car sales. The euro/US dollar assumption is a third below the 12 month high. We underestimated the evolution of the Greek debt crisis. All risk assets are now declining. The key risk is a freeze in the European interbank market.

Consensus Asset Allocation - China is now a consensus overweight market as gross underweights have decreased by six. Managers remain underweight in the Asian export economies of Taiwan and Korea. Russia retained the highest net overweights. Consensus is still biased in favor of energy. We are underweight on commodities, energy, Russia and Brazil. Net UWs in South Africa have decreased to 11 from a peak of 15 in October 2010. Fund managers moved overweight on Indonesia. Among the smaller markets, consensus retained its highest overweight in Turkey and Thailand. Net overweights in Turkey decreased by three.

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