Buying on dips
In an age of recession, some of the Southeast Asian markets offer excellent opportunities, defensive and yet with good earnings potential

The GCC stock markets have not been immune to Wall Street’s credit bubble, distress in international money centre banks and the risk aversion spike in emerging markets. Even though oil prices barely fell below US$90 even on talks of a US recession, it is significant that all GCC markets, including Saudi Arabia (supposedly closed to offshore fund managers), fell in unison. Some high beta shares in the GCC saw dramatic 35 per cent falls in a month, including the Dubai stock exchange operator DFM and the Saudi petrochemical blue chip SABIC. Yet, in a broader context, the GCC market valuations are nowhere near the peak valuations during the 2005-2006 bubble era. Moreover, GCC states have some of the highest current account surpluses to GDP ratios in the world and are not dependent on international liquidity alone. Kuwait, Bahrain and the UAE all trade at 13-14 times earnings yet offer corporate profit growth that can prove as high as 30 per cent in 2008.

So while global panics will lead to an exodus of foreign money and a fall in the GCC indices, a “buy on dips” strategy will be merited by the excellent macroeconomic valuations, negative regional real interest rates, ample liquidity in the region and the creation of new long-term institutional investors, such as pension funds and bank mutual funds. However, economic recession can still mean a US$20-30 fall in oil prices, which would be traumatic for the regional share and property markets. So, even on dips, I would buy electricity firms, telecoms, food and pharma stocks, all traditionally defensive sectors, as compared to vulnerable sectors like banks, brokers, mortgage financiers, cement producers and contracting companies, which are most exposed to a fall in black gold and property prices.

Bullish anchors
Hong Kong property faces exceptional secular bullish anchors: Real GDP growth of 6 per cent, 10-year lows in unemployment rates and mortgage rates below the inflation rate. Since the Hong Kong dollar is pegged to the greenback, the money market HIBOR has sunk to new lows as the Fed slashes rates in response to the Wall Street credit crunch. Moreover, since Hong Kong commercial and residential property yields are higher than the local 10-year bond yields, the market is not at all overpriced. Rising inflation, lower money market rates, supply/demand imbalance, a rise in rental prices with evidence of yield compression, housing affordability still at reasonable levels, a shortage of luxury apartments, and a vibrant secondary market all make Hong Kong property one of the most attractive asset classes in Asia. The beneficiaries of these macro trends includes Kerry Properties, which has the largest exposure to the luxury segment (30 per cent NAV), has developed commercial property in China and has a landbank in Hong Kong island. A midcap property developer that trades at an unjustified 50 per cent discount to NAV is Kowloon Development or CSI, whose business model upgrades commercial buildings in Shanghai and Hong Kong for resale to unlock value.

A contrarian emerging markets call that I happen to agree with is to buy Thai equities. Thailand has been an investment disaster since 2006, when a military coup détat overthrew Prime Minister Thaksin and banned his Thai Rak Thai Party. Yet Thaksin’s allies, who regrouped as the populist PPP, won the recent Thai election. The rumour in Bangkok is that the palace, the military high command and the PPP have come to an agreement that will allow Dr. Thaskin to return from exile in London and reconcile with the generals who overthrew the civilian government. Meanwhile, the Thai central bank will follow the Fed’s rate cuts and bank loan growth and consumer confidence has surged. At 12 times earnings, Bangkok is one of the cheapest markets in Southeast Asia, with major banks trading barely above book value. Thai banks could surge 30 per cent if Thaskin and the generals reach a historic political compromise.

Safe havens
It was only natural that Singapore’s Straits Times index lost 25 per cent of its value in the recent emerging markets sell-off. After all, with an export/GDP ratio that exceeds 200 per cent, Singapore is vulnerable to a US recession and plunge in global trade. Moreover, several Singapore blue chips are proxies for regional cyclical industries, such as petrochemicals, shipping, banking, oil and gas and semiconductors.

The Straits Times index now competes with Mumbai’s Sensex and Hong Kong’s Hang Seng as the most volatile, high beta market in the Asian Pacific Rim. Yet, Singapore also offers some excellent defensive shares that can prove to be relative safe havens during times of emerging markets stress. These include the REIT’s or commercial banks. For instance, DBS, the largest bank in Southeast Asia, now trades at only 1.2 times book value, 10 times earnings and a dividend yield of 5.2 per cent.

The Cambridge REIT, the fastest growing industrial and logistics real estate trust in Singapore, trades at NAV and offers a dividend yield of 10 per cent, almost triple the yield of the local government bond. The Philippines is also an attractive market after the correction, with Manila now trading at only 11 times earnings. A classic defensive share here is Manila Water, which is becoming a regional (Hong Kong, India, Vietnam, China) water resources blue chip. With earnings growth above 25 per cent and higher water tariffs, Manila Water is a defensive value share in Asian emerging markets haunted by the ghost of the grizzlies.
 

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