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Credit Suisse analysts present the case for investing in Asean and Pakistan at London media briefing
“Southeast Asia offers investors remarkable opportunities,” commented Stephen Hagger, Credit Suisse’s Country Head and Head of Equities for Malaysia. “These opportunities are created by common themes that apply across many of the markets in this family – themes like infrastructure investment, the increasing spending power of domestic consumers and the growth of financial services.”
“We held this pioneering investor conference in London to draw attention to this story, which has real scale and momentum, and to offer our clients insight into allocating capital to the region,” added Mr. Hagger. Nine corporates from Southeast Asia and Pakistan participated in the conference along with around 40 UK-based investors from 28 funds.
Commenting on Malaysia , Mr. Hagger said that there was a real chance that Gross Domestic Product growth could be 6%-7% for the next three years due to a “super-cycle” of investment, driven by four factors. First, the Government’s private sector-led Economic Transformation Plan, which has a very real chance of being successful; second, high commodity prices, which are generating huge wealth in rural areas; third, improved relations with Singapore, which should lead to increased cross-border investment; and fourth, the countdown to general elections. The planned introduction of a Goods & Services Tax will be delayed until after this election, which must be held before 2013, and there will also be a pickup in government spending in the run-up to voting. Mr. Hagger noted that his top three picks in Malaysia were UEM Land, RHB Capital and Gamuda.
Teddy Oetomo, Credit Suisse’s Head of Research for Indonesia , discussed what the efforts of Southeast Asia’s biggest economy to break through to the next level of growth would mean for investors. Robust economic growth over the last decade has driven Indonesian valuations to a 30% premium to the MSCI non-Japan Asia Index. Mr. Oetomo argued that Indonesia would need to achieve economic growth of 7% of more for the market to significantly re-rate further, adding that this would require a surge in investment to US$368bn per year for the next five years, equivalent to 58% more than 2010 investment. “Take India as an example,” said Mr. Oetomo. “The country’s investment to GDP ratio surged by 14%over five years from 2002 and stock valuations re-rated by 117% to peak at a 57% premium to the region. If investment in Indonesia can achieve the same kind of effect in the equity market, that implies a 27%-46% upside from here.” Mr. Oetomo added that his top picks were Bank Mandiri, Bank Rakyat Indonesia, Indofood Sukses Makmur and Telkom.
Dante Tinga, Credit Suisse’s Head of Research for the Philippines , noted that sound fundamentals and ample Peso liquidity had helped the Philippines market remain flat for the year and close to all-time highs in spite of global volatility. But while he said he believed inflation fears were priced in, Mr. Tinga said he did not believe that concerns about slowing economic growth, reflected in weak first quarter corporate results, had been priced into the market. In an environment of moderating growth but high liquidity levels, Mr. Tinga said his top picks were stocks that could deliver above-trend earnings growth: Alliance Global, Ayala Land, EDC, Metrobank and San Miguel. “These stocks have a projected average Earnings Per Share Compound Average Growth Rate of 25% for 2010 to 2012, versus just 12.7% for the market,” he said. “These are also companies with growth stories that we think are unique in the Philippines and potentially in Asia.”
Farhan Rizvi, Credit Suisse’s Head of Research for Pakistan , focused on the banking sector in this South Asian country of 187m people, arguing that Pakistan’s market offered some of the most attractive valuations in Asia for banking stocks. Mr. Rizvi said that the banking sector had de-levered since the 2008 crisis, adding that loan-to-deposit ratios had eased to 60% from a 74% high and that Pakistan’s loan-to-GDP ratio of 22% was the lowest in non-Japan Asia. He added that asset quality had improved as a result and that net interest margins should remain positive at 6.7% in 2011 because of expected tightening and static deposit costs. Rising government appetite for fiscal financing, on the other hand, will drive growth in earning assets. “Pakistan is largely ignored by investors, but we believe its banking sector can achieve average annual earnings growth of 18% between 2011 and 2013,” commented Mr. Rizvi, who upgraded Pakistan’s banking stocks to Overweight on June 27. Beyond the banking sector, Mr. Rizvi said there were also attractive valuations and growth potential in the oil and fertilizer sectors.
The Association of South East Asian Nations (Asean) is home to around 600m people, while its six biggest economies – Indonesia, Thailand, Malaysia, Singapore, the Philippines and Vietnam – should have a combined nominal Gross Domestic Product of around US$ 2.14tr in 2011, according to Credit Suisse estimates. This is more than India (US$2.06tr) or Russia (US$1.79tr) and only a little way behind Brazil (US$2.51tr).* The total equity market capitalization of these six Asean countries is US$1.93tr.**
*Source for 2011 GDP estimates: Credit Suisse **Source: Bloomberg, as of July 5, 2011