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

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.
· 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.
· For more on J.P. Morgan's Quant products please see page 5.
· For our latest emerging markets equity strategy, please see Key Trades and Risks - Emerging Markets Equity Strategy, Mowat et al, 27 May 2011.

Table 1: Top stocks combining Q-score and top-down macro strategy

Name Ticker Country JPM Rating Key Trade Overall Q-score
Charoen Pokphand CPF TB Thailand OW OW ASEAN 98.2%
Formosa Chemicals 1326 TT Taiwan N Taiwan Reflation 97.5%
Nan Ya Plastics 1303 TT Taiwan OW Taiwan Reflation 97.1%
Agile Property 3383 HK China OW Dem. Growth 94.2%
Bank Rakyat Indonesia BBRI IJ Indonesia OW OW ASEAN 93.2%
PTT PTT TB Thailand OW OW ASEAN 92.5%
China Communications 1800 HK China N Dem. Growth 91.7%
China Construction Bank 939 HK China OW Dem. Growth 90.1%
President Chain Store 2912 TT Taiwan OW EM Dom. Demand 89.4%
Astra International ASII IJ Indonesia N EM Dom. Demand 89.2%
Bank of China 3988 HK China N Dem. Growth 87.6%
Siam Commercial Bank SCB TB Thailand OW OW ASEAN 86.5%
MRV Engenharia MRVE3 BZ Brazil OW Dem. Growth 85.9%
PDG Realty PDGR3 BZ Brazil OW EM Dom. Demand 85.1%
Mega Financial 2886 TT Taiwan OW Taiwan Reflation 84.0%
Source: J.P. Morgan, Factset, 14 June 2011