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.
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$) index implied a 13.8% upside from the current levels through December 2012.
"In
our scenario-weighted index target, we now assign a probability to Bear
scenario of 20% versus 15% for Bull scenario (fatter tail risk compared
to other Asean 3 markets). Our scenario-weighted index target implies
6.2% upside to from the current levels," it said.
Indonesia
As
for Indonesia, Morgan Stanley Research acknowledged the country's
structural story would continue to be driven by strong demographic-led
domestic demand combined with infrastructure and capacity expansion-led
investment cycle.
"Although Indonesia's earnings are likely to
be relatively defensive, our earlier constructive view on Indonesian
equity markets was driven by a combination of sustainable high RoE,
investment-led growth and falling equity risk premiums. Reduction in
currency volatility has been one of the important drivers for reduction
in Indonesia's equity risk premiums during the last few years.
"However,
high commodity and external capital linkages could increase the
volatility of IDR, thus increasing equity risk premiums and affecting
valuations negatively. Hence, volatility in Indonesian equity markets
could be high, but we would use this volatility as another entry
opportunity," it added.
Morgan Stanley Research said it its base
scenario, it expected MSCI Indonesia to deliver an EPS CAGR 9.0%of
during C2011-13E. MSCI Indonesia (US$) 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.
Singapore
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.