MONTHLY MORNING MEETING APRIL 2016€¦ · 14 BOND MARKET REVIEW 17 STAR RATING PRESENTED BY IFAST FINANCIAL (HK) LTD p5. USA p11. Singapore p13. Malaysia p9. Indonesia p9. Thailand

MONTHLY MORNING MEETING APRIL 2016

PAGE 2 INDICES 3 MARKET INFORMATION 5 MARKETS REVIEW 14 BOND MARKET REVIEW 17 STAR RATING

PRESENTED BY IFAST FINANCIAL (HK) LTD

p5. USA

p11. Singapore p13. Malaysia p9. Indonesia p9. Thailand

p7. South Korea

p12. India

p8. China

p8. Taiwan

p8. Hong Kong

p10. Brazil

p10. Russia

p7. Japan

p6. Europe

DISCLAIMER: THIS REPORT IS NOT TO BE CONSTRUED AS AN OFFER OR SOLICITATION FOR THE SUBSCRIPTION, PURCHASE OR SALE OF ANY FUND . NO INVESTMENT SHOULD BE TAKEN WITHOUT FIRST VIEWING A FUND’ PROSPECTUS. ANY ADVICE HEREIN IS MADE ON A GENERAL. BASIS AND DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES OF THE SPECIFIC PERSON OR GROUP OF PERSONS. PAST PERFORMANCE AND ANY FORCAST IS NOT NECESSARILY INDICATIVE OF LIKELY PERFORMANCE OF THE FUND.THE VALUE OF UNITS AND THE INCOME FROM THEM MAY FALL AS WEEL AS RISE. OPINIONS EXPRESSED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE. INVESTMENT INVOLVES RISK. THE MATERIAL IS ISSUED BY IFHK AND HAS NOT BEEN REVIEWED BY SFC.

MONTHLY MORNING MEETING APRIL 2016. PRESENTED BY iFAST FINANCIAL (HK) LTD ©

PAGE 2

INDICES

US Market & Market PE

SOURCE: BLOOMBERG & IFAST COMPILATIONS

(x) Index Europe Market & Market PE


(x) Index

Singapore Market & Market PE


(x) Index

India Market & PE Market PE


(x) Index

Technology & Market PE


(x) Index

China H-Share Market & Market PE


(x) Index

Asia ex-Japan Market & Market PE


(x) Index

Japan Market & Market PE


(x) Index



PAGE 3

MARKET INFORMATION (AS AT 28 MAR 2016)

INDEX AS AT 28 MAR 2016

CHANGE SINCE 29 FEB2016

2016 RETURN YTD (%)

2015 RETURN (%)

5 YEAR BOND YIELD (%)

USA (S&P 500) 2037.1 5.4% -0.3% -0.7% 1.3%

Europe (Stoxx 600) 335.1 0.4% -8.4% 6.8% -0.3%

Japan (Nikkei 225) 17134.4 6.9% -10.0% 9.1% -0.2%

Emerging Markets (MSCI EM) 813.0 9.8% 2.4% -17.0% 4.3%

Asia ex Japan (MSCI Asia ex Japan) 495.0 8.3% -1.0% -11.3% 2.2%

Singapore (STI) 2830.3 6.1% -1.8% -14.3% 1.6%

Hong Kong (HSI) 20345.6 6.5% -7.2% -7.2% 1.1%

Taiwan (Taiwan Weighted) 8690.5 3.3% 4.2% -10.4% 1.0%

South Korea (KOSPI) 1982.5 3.4% 1.1% 2.4% 1.6%

China (HS Mainland 100) 5988.8 8.6% -7.7% -10.6% 2.6%

Malaysia (KLCI) 1702.4 2.9% 0.6% -3.9% 3.5%

Thailand (SET Index) 1389.0 4.3% 7.8% -14.0% 1.4%

India (SENSEX) 24966.4 8.5% -4.4% -5.0% 7.6%

Indonesia (JCI) 4773.6 0.1% 3.9% -12.1% 7.5%

Russia (RTSI$) 851.7 10.8% 12.5% -4.3% 9.2%

Brazil (IBOV) 50838.2 18.8% 17.3% -13.3% 13.8%

Australia (S&P/ASX 200) 5084.2 4.2% -4.0% -2.1% 2.1%

Technology (NASDAQ 100) 4398.1 4.7% -4.2% 8.4% -

P/E Yr 2016 P/E Yr 2017 P/E Yr 2018 Earnings

Growth 2016 (%) Earnings

Growth 2017 (%)

USA (S&P 500) 17.2 15.2 13.6 0.5% 13.7%

Europe (Stoxx 600) 15.2 13.4 12.2 -3.9% 13.2%

Japan (Nikkei 225)* 15.5 14.3 - 16.8% 8.0%

Emerging Markets (MSCI EM) 11.6 10.0 9.2 10.8% 15.4%

Asia ex Japan (MSCI Asia ex Japan) 12.4 11.1 10.7 -1.0% 11.8%

Singapore (STI) 12.9 12.2 11.6 -3.8% 5.7%

Hong Kong (HSI) 10.8 9.7 9.5 -6.5% 11.2%

Taiwan (Taiwan Weighted) 13.3 12.2 11.8 1.5% 8.4%

South Korea (KOSPI) 11.5 10.4 9.7 11.7% 10.9%

China (HS Mainland 100)+ 8.9 7.9 8.0 -1.6% 12.4%

Malaysia (KLCI) 16.3 15.1 14.4 3.3% 7.8%

Thailand (SET Index) 14.7 13.1 11.8 3.3% 12.4%

India (SENSEX)* 15.2 12.7 - 17.6% 19.3%

Indonesia (JCI) 16.5 14.3 12.2 11.7% 15.4%

Russia (RTSI$) 6.4 4.9 4.9 7.3% 29.3%

Brazil (IBOV) 14.2 10.3 8.4 6.0% 37.8%

Australia (S&P/ASX 200)^ 15.1 13.8 - 9.5% 9.5%

NASDAQ 100 (Technology Heavy) 18.2 15.8 13.9 4.6% 15.1%

SOURCE: IFAST COMPILATIONS, BLOOMBERG ESTIMATES ALL EARNINGS GROWTH FIGURES WERE UPDATED AS AT DATE SPECIFIED

RETURNS ARE IN THE RESPECTIVE LOCAL CURRENCY TERMS AND MSCI INDEX RETURNS ARE IN USD TERMS

MARKET INFORMATION



PAGE 4

EARNINGS YIELD

EARNINGS YIELD 2016 (%) 5 YEAR

BOND YIELD (%) EXCESS YIELD (%)

USA (S&P 500) 5.8% 1.3% 4.5%

Europe (Stoxx 600) 6.6% -0.3% 6.9%

Japan (Nikkei 225)* 6.5% -0.2% 6.7%

Emerging Markets (MSCI EM) 8.6% 4.3% 4.3%

Asia ex Japan (MSCI Asia ex Japan) 8.1% 2.2% 5.9%

Singapore (STI) 7.7% 1.6% 6.1%

Hong Kong (HSI) 9.2% 1.1% 8.1%

Taiwan (Taiwan Weighted) 7.5% 1.0% 6.5%

South Korea (KOSPI) 8.7% 1.6% 7.1%

China (HS Mainland 100)+ 11.2% 2.6% 8.7%

Malaysia (KLCI) 6.1% 3.5% 2.7%

Thailand (SET Index) 6.8% 1.4% 5.4%

India (SENSEX)* 6.6% 7.6% -1.0%

Indonesia (JCI) 6.0% 7.5% -1.4%

Russia (RTSI$) 15.6% 9.2% 6.5%

Brazil (IBOV) 7.0% 13.8% -6.8%

Australia (S&P/ASX 200)^ 6.6% 2.1% 4.5%

MARKET STAR RATINGS OUR 3 YEAR VIEW

Asia ex-Japan 5.0 Very Attractive

Emerging Markets 5.0 Very Attractive

Europe 3.0 Attractive US 2.5 Neutral

Japan 3.5 Attractive

MARKET STAR RATINGS OUR 3 YEAR VIEW

Singapore 4.0 Very Attractive

China A 3.5 Attractive

China 5.0 Very Attractive

Hong Kong 5.0 Very Attractive

Technology 3.0 Attractive

South Korea 4.5 Very Attractive

Indonesia 2.5 Neutral

India 3.5 Attractive

Thailand 2.5 Neutral

Malaysia 3.0 Attractive

Taiwan 4.0 Very Attractive

Brazil 4.0 Very Attractive

Russia 4.5 Very Attractive

SOURCE: IFAST FINANCIAL COMPILATIONS, BLOOMBERG ESTIMATES. EARNINGS YIELD IS THE RECIPROCAL OF THE PRICE-EARNINGS RATIO. IT IS BASICALLY

THE AMOUNT OF EARNINGS YOU PURCHASE FOR EVERY DOLLAR WORTH OF THE STOCK (I.E. IF A MARKET HAS AN ESTIMATED PE OF 12X, THE EARNINGS YIELD IS 8.3%) *JAPAN AND INDIA PE FORECASTS ARE BASED ON FISCAL YEAR ENDED MARCH 2014 2015 AND 2016 RESPECTIVELY

^AUSTRALIA PE FORECASTS ARE BASED ON FISCAL YEAR ENDED JUNE 2013, 2014 AND 2015 AND ALL RETURNS ARE IN THEIR RESPECTIVE LOCAL CURRENCY TERMS.

+THE HANG SENG MAINLAND 100 INDEX (HSML100) COMPRISES BOTH H-SHARE COMPANIES AND RED-CHIP STOCKS AS WELL AS SHARES OF OTHER HONG KONG –LISTED MAINLAND COMPANIES.

HSML100 INDEX DERIVES A MAJORITY OF THEIR SALES REVENUE FROM MAINLAND CHINA. THIS SUMMARY IS NOT TO BE CONSTRUED AS AN OFFER OR SOLICITATION FOR THE SUBSCRIPTION, PURCHASE OR SALE OF ANY FUND. NO INVESTMENT DECISION SHOULD

BE TAKEN WITHOUT FIRST VIEWING A FUND'S PROSPECTUS. ANY ADVICE HEREIN IS MADE ON A GENERAL BASIS AND DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES OF THE SPECIFIC PERSON OR GROUP OF PERSONS. PAST PERFORMANCE AND ANY FORECAST IS NOT NECESSARILY INDICATIVE OF THE FUTURE OR LIKELY PERFORMANCE OF THE FUND. THE VALUE OF UNITS AND THE INCOME FROM THEM MAY FALL AS WELL AS RISE. OPINIONS EXPRESSED HEREIN ARE SUBJECT TO

CHANGE WITHOUT NOTICE. PLEASE READ OUR DISCLAIMER

MARKET INFORMATION

http://www.fundsupermart.com/main/home/disclaimer.tpl



PAGE 5

MARKETS REVIEW

REGIONAL MARKETS UPDATE

US MARKET (2.5 STARS – NEUTRAL)

MARKET OUTLOOK

COMME

ISM Manufacturing PMI came in at 49.5 in Feb 16, up from 48.2 in Jan 16

ISM Non-Manufacturing composite came in at 53.4 in Feb 16, down from a 53.5 reading in Jan 16

Nonfarm payrolls rose by 242,000 in Feb 16, after an upward-revised 172,000 increase in Jan 16

Private payrolls rose by 230,000 in Feb 16, after an upward-revised 182,000 increase in Jan 16

Unemployment rate at 4.9% in Jan 16, down from 5.0% in Dec 15

Factory orders rose 1.6% m-o-m in Jan 16, after a -2.9% decline in Dec 15

Seasonally-adjusted producer prices for Final Demand goods fell -0.2% m-o-m in Feb 16, down from a 0.1% increase in Jan 16

Advance retail sales fell -0.1% m-o-m in Feb 16, after a downward-revised -0.4% m-o-m decrease in Jan 16

Excluding autos and gas, retail sales rose 0.3% m-o-m in Feb 16, after a downward-revised -0.1% m-o-m decrease in Jan 16

Industrial production fell -0.5% m-o-m in Feb 16, after a downward-revised 0.8% m-o-m increase in Jan 16

Leading index posted 0.1% m-o-m increase in Feb 16, after a -0.2% decline in Jan 16

Housing starts registered a 1.178 million annual rate in Feb 16, after an upward-revised 1.12 million annual rate in Jan 16

Building permits registered a 1.167 million annual rate in Feb 16, after an upward-revised 1.204 million rate in Jan 16

Existing home sales fell -7.1% m-o-m in Feb 16 to a 5.08 million annual rate, after a 0.4% m-o-m increase in Jan 16

Consumer confidence index at 96.2 in Mar 16, up from an upward-revised 94.0 reading in Feb 16

Based on the S&P/Case-Shiller Composite 20, US home prices rose 5.75% y-o-y in Jan 16, up from a prior downward-revised 5.65% increase in Dec 15

Fed Funds rate at 0.25% – 0.50%

Earnings estimates for American companies (as represented by the S&P 500 index) on aggregate saw slight downward revisions over the month – with 2016’s estimated earnings lowered by -0.87%, while 2017’s estimated earnings were revised -0.62% lower and 2018’s earnings lowered -1.2% (as of 28 March 2016). Year-to-date, 2016’s estimated earnings have been revised lower by -4.8%, while 2017’s and 2018’s estimated earnings were lowered by -4.1% and -2.8% respectively. Downward earnings revisions were somewhat broad-based, with the information technology and consumer discretionary sectors seeing minor or no changes at all over the month. The energy sector once again bore the brunt of EPS downgrades, with 2016’s estimated earnings lowered -16.5% month-to-date, while 2017’s estimated earnings were downgraded by -5.8%. Companies from the materials sector also saw earnings downgrades over the period, while US financials saw 2016’s and 2017’s estimated earnings revised -1.7% and -1.0% south respectively. The big US banks with the likes of Goldman Sachs, Bank of America, Citigroup and JPMorgan Chase saw their estimated EPS downgraded -4.7%, -4.3%, -3.9% and -1.01% respectively over the month, as consensus lowered their revenue expectations on the market segment.

With regards to recent economic data from the US, the ISM Manufacturing PMI continued to stay in contractionary territory for the fifth consecutive month, registering a reading of 49.5 in February, improving from a prior 48.2 reading. The ISM Prices Paid index also registered improved readings in February. As highlighted last month, recent readings could suggest a stabilisation to US manufacturing, but it remains to be seen if momentum could be maintained. Services (represented by the ISM Non-Manufacturing PMI readings) beat consensus estimates, coming in at 53.4 in February, down from a 53.5 reading in January, and still remaining in expansionary territory. Employment data remained positive in February, with the US economy adding 242,000 jobs for the month. The unemployment rate remained at 4.9%, while the labour force participation rate improved from a prior 62.7% to 62.9%. Retailers posted strong employment gains for a second consecutive month (+55,000), along with the health care sector (57,400). Manufacturing payrolls however, fell by -16,000 as compared to a prior downward-revised 23,000 increase. On the other hand, wages fell short of expectations, with average hourly earnings declining -0.1% month-on-month (rising 2.2% year-on-year) as compared to a 0.5% month-on-month increase in January, marking its first month-on-month decline since December 2014. The latest retail sales data disappointed analysts and economists, as January’s data were revised downwards, dashing optimism that consumer spending got off to a strong start this year. The downward adjustments were driven by adjustments to sales of electronics and appliances, personal-care items and building materials. Going forward, a continued improvement in the labour market, sustained wage growth, as well as low energy costs would support consumption in the US.

In the latest meeting of the Federal Open Market Committee (FOMC), the Federal Reserve has kept interest rates unchanged (at 0.25% - 0.50%), but has cited that “global economic and financial developments continue to pose risks” to the US economy. The Fed has also lowered its projections for the Federal Funds rate from a prior 1.375% in December 2015 to 0.875%, in effect communicating that it expects to hike the benchmark rate by 2 times instead of 4 times (assuming a 25 bps hike in each meeting where a hike would be announced). The Fed has also trimmed its forecast for economic growth in 2016 and 2017 from a prior 2.4% and 2.2% respectively to the current 2.2% and 2.1% respectively. Markets cheered the latest FOMC announcement, interpreting the news rather dovishly, with equity markets rallying and the USD weakening against many currencies. We reiterate our view that the rate hike process would be gradual and paced out going forward.

As of 28 March 2016, the US equity market (as represented by the benchmark S&P 500 Index) trades at 17.2X and 15.2X 2016’s and 2017’s estimated earnings respectively, as compared to its fair PE ratio of 15.0X. Earnings growth remain muted for 2016, with companies expected to grow earnings by 0.6% for the year, before growing 13.6% and 11.7% in 2017 and 2018. Forecasted returns of US equities remain one of the lowest among the equity markets under our coverage. Taking into consideration the potential for profit margins weighing on corporate earnings growth prospects as the US economy enters the later stages of the business cycle, a “Neutral” stance is appropriate at this juncture. Thus, we maintain a 2.5 Stars “Neutral” rating for the US equity market.



PAGE 6

MARKETS REVIEW

REGIONAL MARKETS UPDATE

EUROPE (3.0 STARS – ATTRACTIVE)

MARKET OUTLOOK

RECOM

EUROZONE AGGREGATE

Advance Eurozone PMI composite rose to 53.7 in Mar 16, up from an upward finalised 53.0 reading in Feb 16

Adv Consumer Confidence fell to -9.7 in Mar 16 from a -8.8 reading in Feb 16

Retail sales rose 2.0% y-o-y in Jan 16, down from an upward revised 2.1% growth rate in Dec 15

ZEW survey (economic sentiment) fell to 10.6 in Mar 16, down from 13.6 in Feb 16

Sentix Investor Confidence fell to 5.5 in Mar 16, down from 6 in Feb 16

ECB unleashes more easing; main refinancing rate -5bps to 0.0%, deposit facility rate -10bps to -0.4%, new TLTRO programme, asset purchase programme increased by EUR 20 billion to EUR 80 billion and now includes investment grade bonds from non-financial corporates

GERMANY

Advance composite PMI read 54.1 in Mar 16, unchanged from an upward finalised 54.1 level in Feb 16

Factory orders rose 1.1% y-o-y in Jan 16, up from an upward revised -2.1% decline in Dec 15

ZEW survey fell for the current situation reading but rose for the expectations survey

IFO surveys rose across the board for the expectations, business climate and current assessment readings

FRANCE

Preliminary PMI composite rose to 51.1 in Mar 16, up from a 49.3 level in Feb 16

Industrial production rose 2.0% y-o-y in Jan 16, up from an upward revised -0.2% decline in Dec 15

Bank of France business sentiment and INSEE business confidence fell in Feb 16

Earnings season has effectively wrapped up in Europe, with the Stoxx 600 posting a headline loss of -3.8% as it was hampered by the energy and materials sectors which posted losses of -41.3% and 27.5% respectively. While there have been plenty of worries over the profitability of European banks, they posted earnings growth of 6.7% as a whole for 2015 while the financial sector at large posted earnings growth of 2.9%. In more positive news, the consumer discretionary and IT sectors posted earnings growth of 21.6% and 19.3% respectively for 2015.

European earnings estimates for 2016 have continued to be revised down over the course of the month, with earnings being marked down by -2.0% on a month-to-date basis to bring year-to-date revisions to -8.4% on a year-to-date basis (as of 24 March 2016) to bring overall revisions to -17.3% from the start of 2H 2015. On a sectoral basis, unlike February which saw widespread downward revisions, March has seen upgrades to sectors such as retail (+1.5%), financial services (+0.8%), and automobile makers (+0.6%) while downgrades impacted the oil & gas sector (-10.3%) and basic resources (-4.1%) the worst. As a whole, the index is looking at posting a headline loss of -3.8% in 2016. Given the substantial downgrades seen since 2H 2015, there lies the possibility that earnings estimates have been downgraded too far and a potential for upward revisions exists should no crisis come to bear.

Leading indicators pointed show signs of resilience in the month of March, with PMI readings showing improvement while Eurozone aggregate sentiment indicators slowed their pace of decline. The current weakness seen in sentiment indicators have not significantly impacted PMI readings yet, which points towards another quarter of growth for Europe in 1Q 2016. Additional factors likely to weigh on sentiment in the near term include the risk of a “Brexit”, which is in nobody’s favour should it take place as well as the possibility of more terrorist attacks.

The ECB eased monetary policy significantly further in March. Apart from sending the deposit facility rate further into negative territory by 10 bps to -0.40%, the ECB has also reduced the main refinancing operations rate by 5bps to 0.00%. As for its unconventional monetary policy actions, the ECB has increased the amount of its asset purchase programme (APP) by EUR 20 billion from EUR 60 billion to EUR 80 billion per month and expanded the range of instruments to include investment grade non-financial corporate bonds. Not content with rate cuts and enhancements to its APP, the ECB has launched a new series of Targeted Longer-term Refinancing Operations (LTRO II) as it seeks to reinforce its accommodative policy stance and to strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. Interestingly, should banks whose net lending increases by 2.5% by January 2018, they will receive the difference between the main refinancing rate and the deposit facility rate which translates into banks being paid a maximum of 0.40% by the ECB to lend.

For the month of March, the Stoxx 600 Index was relatively muted, gaining 0.35% over the course of the month to reduce year-to-date losses to -8.4% (in local currency terms as of 24 March 2016) from a year-to-date low of -17.0% on 11 February. At current levels, the market trades at 15.2X and 13.4X based on 2016 and 2017 estimated earnings. While we upgraded our rating for Europe to “3.0 stars – Attractive” on 12 February, given that valuations were at their most attractive since February 2014, the market has since staged a quick rebound (+7.3%), reducing the attractiveness of the market at current prices - We are once again keeping an eye on valuations.



PAGE 7

MARKETS REVIEW

REGIONAL MARKETS UPDATE NORTH ASIA

MARKET OUTLOOK As at 28 March 2016, both the estimated earnings of Japanese equities for FY 2015 (ended March 2016) and FY 2016 (ended March 2017) have been revised downwards by -9.24% and -4.05% year-to-date (in terms of fiscal year, ranging from 1 April 2015 to 22 February 2016) respectively. Earnings of Japanese equities are expected to increase by 16.7% in FY 2016 and 8.2% in FY 2017. On the other hand, earnings of the South Korean equity market are expected to increase by 11.4% in 2016, 11.0% in 2017 and 7.3% for 2018.

In line with our view, the Bank of Japan (BOJ) did not expand its stimulus package in March. Within the March policy statement, a line regarding readiness to cut the rate further has been removed when compared to the January’s statement, although Governor Kuroda is stil l insisting that the negative rate policy works, the likelihood of a further rate cut in recent terms are slim, especially when the European Central Bank’s (ECB) “over-delivering” stimulus expansion which includes a further rate cut has not yet show its intended effect on the currency and equity market. As Japan’s wage growth for 2016 is looking to be minimal with the released of additional information regarding the Shuntō and as the JPY is still trading at a high value level of 113 per dollar, we still strongly believe that a stimulus package expansion is coming soon for Japan, with a high possibility that it will take place either in April or June, but as illustrated above, the stimulus expansion will now likely to be led by an increase in asset purchasing size instead of further rate cut. In terms of asset purchases, the BOJ could expand the eligible basket of assets for consideration to include both local government bonds as well as public corporate bonds, which are both perceived as ‘quasi-sovereign’, and are not yet included in the QQE programme. Additionally, policy-makers are likely to coordinate a fiscal response as well, particularly before the Upper Parliament’s election in July. As for South Korea, the never ending exports slump has further strengthened the case to invest in the countries’ consumption market, which is relatively safe from foreign demand weakness. While exports are having its 14th consecutive monthly decline on export in year-on-year terms, the country’s retail sales is experiencing a positive year-on-year growth ever since July 2015, and on average the retail sales growth is of 4.7% year-on-year for the past 5 months ending January 2016. Notice that food, cosmetics and household appliances are the three fastest growing industries in terms of retail sales expansion, these three industries all have a stable customer base that is less affected by external economic factors, especially against the equity market’s volatility.

As at 28 March 2016, the estimated PE ratios of Nikkei 225 Index were 15.5X for FY 2016 and 14.3X for FY 2017; the estimated PE ratios for the KOSPI index were at 11.6X and 10.4X for 2016 and 9.7X for 2017. Valuations remain rather attractive as compared to other equity markets under coverage. Thus, we maintain our star ratings of the Japanese and the South Korean equity markets at an “Attractive” rating of 3.5 stars and at a “Very Attractive” rating of 4.5 stars respectively.

**Japan’s fiscal year ended in March (e.g FY 2015 ends in March 2015)

Japan’s Eco Watcher’s Outlook Index has fallen back to 48.2 in Feb 16 from 49.5 in Jan 16

Japan’s Machine Orders spiked significantly by 8.4% y-o-y in Jan 16, much higher than the -3.8% market expectation and the -3.6%

shrinkage as seen in Dec 15

Japan’s Consumer Confidence fell for the second month with a higher magnitude, with the readings dropped to 40.1 in Feb 16 from 42.5

in Jan 16

Japan’s HSBC Manufacturing PMI’s preliminary data fell to the lowest level in three years and has again reached the sub-50 shrinkage

level as seen in Apr 15. The Index fell to 49.1 in Mar 16, lower than the market consensus of 50.5

Japan’s exports fell -4.0% y-o-y in Feb 16 , slightly better than the expected -3.0% decrease and rebounding significantly from the -

12.9% y-o-y decline in Jan 16, yet still the fifth consecutive month that Japan records a decline in exports in y-o-y terms

Imports slumped by -14.2% y-o-y in Feb 16

JAPAN (3.5 STARS– ATTRACTIVE)

SOUTH KOREA: 4.5 STARS－VERY ATTRACTIVE

Korean Won (KRW) appreciated slightly against USD by 0.87% YTD as it has experienced a 6.19% appreciation MTD. The Japanese

Yen (JPY) appreciated against USD by 6.00% YTD, mainly due to the great appreciation as seen in the first half of Feb 16

Korea’s HSBC Manufacturing PMI fell for the second month to 48.7 in Dec 16 from 49.5 in Jan 16

Korea’s exports slumped again by -12.2% y-o-y in Feb 16, although the decline is lower than the -16.6% market consensus and the -

18.9% fall as seen in previously, it is still the 14th consecutive month of contracting exports in y-o-y terms.

Imports decreased by -14.6% y-o-y in Feb 16, lower than the -16.0% market consensus



PAGE 8

MARKETS REVIEW

SOUTH EAST ASIA

MARKET OUTLOOK The earnings outlook for the STI remained downbeat in the month of March, as estimated earnings for 2016 was revised downward by -2.0%, while earnings for 2017 were downgraded by -2.2% (as of 29 March 2016). Notable earnings revisions came from the financials sector. Hongkong Land saw its estimated earnings slashed -7.0% month-to-date as commercial office rentals could be negatively impacted by the Hong Kong government’s plans to boost land supply for offices in the year ending March 2017, facilitating the city's economic development by providing more affordable office space. A prolonged weakness in the Hong Kong retail market may also lower Hongkong Land’s revenue growth. Meanwhile, CapitaLand, which derives more than half of its revenue from mainland China, saw its estimated earnings downgraded -4.5% as China grapples with an oversupply in its property market, particularly in lower-tier cities, and the absence of any measures in Budget 2016 to prop up Singapore’s property sector meant that the current muted is likely to persist. As a whole, the earnings of the Singapore equity market is expected to decline by -3.8% from 2015, before growing 5.7% in 2017. Finance Minister Mr Heng Swee Kiat unveiled this month the details of his maiden Budget, which took a more business-centric approach, with targeted measures to support businesses, particularly SMEs, and raise the productivity of Singapore's workforce. The Budget statement came as Singapore's trade-reliant economy is buffeted by a protracted slowdown in China, as well as weak global demand, with SMEs bearing most of the brunt. To help SMEs tide through the current economic uncertainty, the Budget has announced a suite of near-term measures to address their immediate concerns. While the economic outlook of Singapore remains soft, these near-term measures have alleviated some of the downside risks to growth this year. As such, we expect Singapore's GDP this year to come in within the Government's target of 1 – 3%. There were also longer-term initiatives to transform the economy into one that focuses on innovation and value creation. Given the current economic slowdown, an expansionary fiscal policy stance is perhaps appropriate. It may not have been the blockbuster Budget that pessimists were hoping for to breathe life into Singapore's slowing economy, but it is certainly a step in the right direction to prepare the nation for the future, and remain relevant in the face of disruptive technological changes. Singapore's consumer price inflation in February 2016 came in at -0.8% year-on-year, lower than the -0.6% inflation in January and was below market expectations for a -0.7% decline in consumer prices. The MAS core inflation, which excludes the costs of accommodation and private road transport, stood at 0.5% year-on-year, up from January's 0.4%. The MAS and MTI has maintained their forecast of headline inflation and MAS core inflation to come in at -1.0 – 0.0% and 0.5 – 1.5% respectively for the whole of 2016. Retail sales in Singapore, propped up by strong sales of motor vehicles, surged 7.5% year-on-year in January 2016, after a downward-revised 2.8% growth seen in the previous month and trumped market expectations for a 3.1% increase. Excluding sales of motor vehicles, however, retail sales grew by a more modest 1.4% year-on-year. Meanwhile, industrial production fell -4.7% year-on-year in February 2016 after an upward revised 0.1% increase in the prior month, while non-oil domestic exports (NODX) grew 2.1% year-on-year in February 2016, reversing from a downward-revised -10.1% decline in January. The key 3-month SIBOR, which tends to move in tandem with US interest rates, dipped approximately -7 basis points in March to 1.17904% (as of 29 March 2016). The Singapore equity market extended its gains from the previous month, with the FTSE STI gaining 5.7% (as of 29 March 2016) in March. The resilience of the three local banks, which collectively make up 34.2% of the FTSE STI, in the face of challenges has attracted substantial interest from investors in March. The share prices of DBS, OCBC and UOB surged 11.7%, 10.0% and 8.5% respectively to add 35.3, 32.4 and 21.7 points to the index respectively. Also fuelling the STI’s performance in March was two other index heavyweights, Keppel and Singtel, whose share prices rose 12.0% and 2.4% respectively to contribute 6.5% and 4.9% of overall index returns respectively. The month also saw the struggling Noble Group dropped from the STI, while CapitaLand Commercial Trust Ltd was unveiled as the new kid on the block. Global growth is expected to improve only marginally in 2016, supported by gradual improvements in the advanced economies. While growth momentum in the US has weakened in recent months, the US economy is expected improve this year, underpinned by domestic demand. The Eurozone economy is also poised to expand at a modest pace this year, bolstered by a continued easing of monetary conditions. The economic slowdown in China, however, could weigh on growth prospects. In light of these developments, Singapore’s economy is forecasted to remain on a modest growth trajectory, supported by domestically oriented industries, although the outlook for the manufacturing industry remains weak. On current forecasts (as of 29 March 2016), the Singapore equity market trades at estimated PE ratios of 12.9X and 12.2X for 2016 and 2017 respectively, representing a significant discount to our fair PE estimate of 16.0X for the Singapore market. We think a 4.0 stars “Very Attractive” rating on the Singapore equity market continues to be warranted at this juncture.

SINGAPORE –4.0 STARS (VERY ATTRACTIVE)

Purchasing Managers Index was at 48.5 in Feb 16, down from a reading of 49.0 in Jan 16

Electronics sector PMI fell to 48.2 in Feb 16 from 48.5 in Jan 16

Retail sales surged 7.5% y-o-y in Jan 16, after a downward-revised 2.8% y-o-y increase in Dec 15

Retail sales ex-autos rose 1.4% y-o-y in Jan 16, after a revised -3.7% y-o-y decline in Dec 15

Non-oil domestic exports grew 2.1% y-o-y in Feb 16, after a revised -10.1% y-o-y decline in Jan 16

Electronic exports rose 0.7% y-o-y in Feb 16, up from a -0.6% y-o-y contraction in Jan 16

CPI was at -0.8% y-o-y in Feb 16, down from a -0.6 y-o-y decline in Jan 16

Core CPI rose 0.5% y-o-y in Feb 16, up slightly from a 0.4% y-o-y increase in Jan 16

Industrial production slipped -4.7% y-o-y in Feb 16, down from a revised 0.1% increase in Jan 16



PAGE 9

MARKET OUTLOOK

MARKETS REVIEW

As of 28 March 2016, KLCI companies are expected to post EPS of 104.4, 112.5 and 118.4 for 2016, 2017 and 2018 respectively, representing earnings growth of 3.4%, 7.8% and 5.2% for the three respective years. These translate into PE ratios of 16.3X, 15.1X and 14.4X for the three years. KLCI saw its 2016 estimated earnings revised downwards by -1.9% in March following a -0.2% downgrade in February. Most of the sectors suffered earnings downgrades in March, with an exception to defensive sectors like healthcare and utilities. Materials and consumer discretionary recorded the largest earnings downgrades among all of the sectors, which saw earnings forecasts being slashed by -7.0% and -5.0% respectively. For the materials sector, Petronas Chemicals Group Bhd-the sole component of the sector saw earnings downgrades in March as a low oil price environment is expected to pressure its product prices and margins until 2H16. On the other hand, earnings downgrades in the consumer discretionary sector were broad based, led by a -24.1% earnings revision for UMW Holdings Bhd as analysts factored in the poor earnings announcement in FY15.

Malaysia’s exports fell -2.8% in January 2016, worse than the consensus estimates for a 2.5% year-on-year growth and a 1.4% year-on-

year expansion in the prior month. The poor result in January was led by a decline in total exports for Liquefied Natural Gas (-48.2%), crude petroleum (-38.2%) and refined petroleum products (-19.4%) as oil prices slumped to a new low over the month. These products comprised 12.4% of the total exports of Malaysia in January 2016. Nonetheless, the slowdown in shipments of oil-related products was offset by the resilient growth in exports of electrical and electronic products, which grew by 2.6% year-on-year over the month. On the other hand, imports growth rose to 3.3% year-on-year in January from a prior upward revised 3.2%, but still fell short of the market expectations for a 4.9% year-on-year expansion. The increase in imports was attributed to intermediate goods and consumption goods, which grew 5.1% and 33.1% in January respectively. With imports holding up well and exports deteriorating, the trade balance has also narrowed from an upward revised 8.25b to 5.39b in January. Despite having disappointing exports growth in January, it is likely to grow at a stronger pace on the back of a rebound in oil prices lately and a still weak Ringgit at this juncture. As we expect muted demand for imported goods on the back of record low consumer sentiment and weak ringgit, trade balance will likely widen in 2016.

Industrial production growth rose to 3.2% year-on-year from a prior 2.7%, surpassing the market consensus for a 2.1% year-on-year

expansion in January 2016. The increase in January 2016 was supported by positive growth in all sub indices, namely Manufacturing (3.9%), Mining (0.7%) and Electricity (7.7%). While industrial production has delivered a positive surprise for two consecutive months, it remains to be seen whether this momentum is going to persist moving forward given the subdued growth outlook for the economy.

Inflation accelerated to a seven-year high at 4.2% year-on-year rate in February from a prior expansion of 3.5%, exceeding the market

expectations for a 4.1% year-on-year increase. The rise was contributed by a series of subsidy removals and tariff hikes for various goods by the government as a part of its fiscal consolidation plan. Although the inflation rate is expected to ease after 1Q16 as the impact from GST tapers off, the on-going fiscal consolidation by the government would likely see prices remain elevated throughout 2016, assuming oil prices stay at weak in 2016- a reasonable scenario given the ongoing supply glut and subdued global demand for 2016.

As of 28 March 2016, KLCI has gained 1.7% on the back of improved investor sentiment as oil prices rebounded and central-bank

policies shifted favourably. The estimated PE ratio of KLCI Index is trading at 16.3X and 15.1X estimated PE ratio for 2016 and 2017, slightly above our fair PE of 16.0X. Although we believe there will be earnings downgrades going forward, a mid-single digit earnings growth is possible amid a moderate GDP growth in 2016 and a low base effect from 2015. This leads us to believe that Malaysian equities will deliver a modest single digit return this year, considering a limited room for valuation expansion. We maintained the star ratings for Malaysia at 3.0 stars “Attractive”.

SOUTH EAST ASIA

MALAYSIA – 3.0 STARS (ATTRACTIVE) Exports fell -2.8% y-o-y in Jan 16, after a 1.4% y-o-y increase in Dec 15

Imports registered a 3.3% y-o-y rise in Jan 16, higher than an upward revised 3.2% y-o-y growth rate in Dec 15

Trade balance shrank to RM5.39billion in Jan 16, down from a RM8.25billion in Dec 15

Industrial production grew 3.2% y-o-y in Jan 16, improving from a 2.7% y-o-y climb in Dec 15

CPI spiked up to 4.2% in Feb 16, the highest rate since Dec 08



PAGE 10

MARKET OUTLOOK

MARKETS REVIEW

In February, Thai equities saw its earnings forecasts for 2016 and 2017 being downgraded by -0.8% and -0.6%, bringing the earnings growth for the SET Index to be at 3.0% and 12.8% respectively. For Thai equities, earnings deterioration continued to prevail, as most of the sectors suffered from earnings downgrades over the month, with the exception of Energy (+0.7%), Industrials (+0.4%) and Utilities (+0.1%). The overall drawdown for 2016 earnings estimates was once again led by Telecommunications. The earnings for the telecommunication sector was downgraded by -3.4%, after a -7.2% downward revision on its earnings in the previous month. The earnings downgrades in the telecommunication sector were broad-based, with most of the earnings of the telecommunication companies being slashed by analysts. Increased competition between telecommunication companies amid aggressive license bidding and auction activities has led to analysts’ expectations of potential market share loss and margin compression among these companies. This has prompted analysts to downgrade their earnings, and we expect earnings downgrades to persist in this sector going forward. As for Indonesia, the downward earnings revision was minimal over the month, with the 2015 and 2016 earnings being slashed by -0.7% and -0.4% respectively. The downward earnings revision was once again led by the energy sector, which saw a -6.0% cut after a -4.3% downward revision in prior month. Main contributors of earnings downgrades within Energy were coal mining companies such as Tambang Batubara Bukit Asam Persero Tbk and Indo Tambangraya Megah Tbk PT, with their earnings being slashed by -8.8% and -32.5% respectively. Other contributors to the earnings downgrades were Health Care (-2.7%), Telecommunications (-2.5%) and Consumer Discretionary (-1.2%). In Thailand, 4Q earnings seasons have concluded, with Thai corporate posting an aggregate earnings surprise of 36.8%, mainly due to higher than expected quarterly earnings registered by Energy, Materials and Industrials. On the other hand, Indonesia companies, on aggregate, recorded a negative earnings surprise of -15.5%, marking the seventh consecutive quarters that Indonesian companies have underperformed consensus forecasts. Industrials, Utilities, Consumer Staples and Consumer Discretionary were among the sectors that have missed consensus estimates significantly, posting negative earnings surprises of -64%, -35%, -53% and -14% respectively. In the month of February, Thailand continued to see its headline inflation rate staying in negative territory. The kingdom recorded a headline inflation rate of -0.5% year-on-year in February, which was close to previous month’s reading and consensus estimates. The headline inflation rate has been persistently in contractionary territory since the beginning of 2015 due to the sharp contractions in energy and transportation prices. Nevertheless, stripping off the volatile food and energy prices, the kingdom appears to be in an inflationary environment as the core inflation rate remains within the positive territory. Over the month, Thailand’s core inflation rate grew at 0.7%, higher than the consensus forecasts of a 0.6% growth. In Indonesia, inflation rose rate grew by 4.4% year-on-year in February, higher than prior month’s 4.1%, mainly on higher food and transportation prices. While there was an uptick in the nation’s inflation rate in recent months, we expect the inflation rate to grow a moderate pace on high base effect amid fuel subsidy removal in late 2014. With the low inflationary environment in Thailand and Indonesia, the central banks of these respective countries are likely to maintain an accommodative monetary stance in order to support their nations’ economic growth. In fact, for Indonesia, the central bank has started to engage in a pro-growth monetary policy since the beginning of 2016, slashing its benchmark interest rate (25 basis points each) in each of its monetary policy meetings. Based on consensus forecasts as of 25 March 2016, the estimated PE ratio for SET Index is at PE ratio of 14.7X for 2016, relatively higher as compared to our fair PE estimate of 12.5 X. We remain cautious on the possible headwinds faced by the kingdom, such as weak exports growth and earnings deterioration. As such, we maintain Thailand’s star rating at 2.5 stars (Neutral). As for Indonesia, various fiscal initiatives implemented by the Indonesian governments, along with the pro-growth monetary policy measures, are likely to be positive for economic growth and supportive for corporate earnings. However, one of the major concerns we have for this market is its valuation metric; the PE valuation of the Indonesian market is by no means attractive. As of 25 March 2016, the Indonesian equity market, as represented by the JCI Index, was trading at a PE ratio of 16.7X, significantly higher as compared to our fair PE estimate of 14.0X. As such, we maintain our ‘Neutral’ rating of 2.5 stars for Indonesia equities.

SOUTH EAST ASIA

THAILAND – 2.5 STARS (NEUTRAL)

Consumer Price Index decreased by -0.5% y-o-y in Feb 16, after a –0.5% y-o-y decrease in Jan 16

Core CPI increased by 0.7% y-o-y in Feb 16, after a 0.6% y-o-y increase in Jan 16

Consumer economic confidence decreased to 63.5 in Feb 16, from a 64.4 reading in Jan 16

Consumer confidence decreased to 74.7 in Feb 16, from a 75.5 reading in Jan 16

Customs exports increased by 10.3% y-o-y in Feb 16, from a -8.9% y-o-y decrease in Jan 16

Customs Imports decreased by -16.8% y-o-y in Feb 16, from a -12.4% y-o-y decrease in Jan 16

INDONESIA – 2.5 STARS (NEUTRAL)

Exports contracted by -7.2% y-o-y in Feb 16, after a downward revised -20.9% y-o-y decrease in Jan 16

Imports contracted by -11.7% y-o-y in Feb 16, after an upward revised -17.0% y-o-y decrease in Jan 16

Indonesia posted a trade surplus of USD 1136 million in Feb 16, compared to a downward-revised surplus of USD 14 million in Jan 16

CPI increased to 4.4% y-o-y in Feb 16, after a 4.1% y-o-y increase in Jan 16

Consumer Confidence Index decreased to 110.0 in Feb 16 from 112.6 in Jan 16

Bank Indonesia cuts its benchmark interest rate by 25 basis points to 6.75%



PAGE 11

Indian exports in February 2016 contracted by -5.66% year-on-year and were valued at USD 20.73 billion as against USD 21.98 billion in February 2015. Imports, on the other hand, also contracted by -5.03% and were valued at USD 27.28 billion as against USD 28.72 billion in February 2015. The trade deficit for February 2016 stood at USD -6.54 billion, as against USD -6.74 billion back in February 2015. India’s factory output represented by the Index of Industrial Production (IIP) contracted to -1.5% year-on-year for January 2016, as compared to 0.9% year-on-year in the previous month. Growth rates in major sectors like mining, manufacturing and electricity were at 1.2%, -2.8% and 6.6% respectively on a year-on-year basis. On a Use-based classification, Basic Goods, Capital Goods and Intermediate Goods grew by 1.8%, -20.4% and 2.7% respectively. India’s Consumer Price Index (CPI) for February 2016 declined to 5.18% year-on-year as against a 17 month high of 5.69% in the previous month. A look into the index components revealed that the Food and beverages Inflation stood at 5.52% in February 2016, as compared to 6.66% in the previous month. Within this segment, the inflation on vegetables reduced to 0.70% year-on-year from 6.39% in the previous month and inflation on pulses moderated slightly from 43.32% year-on-year in January to 38.3% in February 2016. Fuel and Light inflation was at 4.59% in February, as compared to 5.32% in the previous month. After meeting the RBI’s target for January 2016, Inflation trends have moderated which could give the central bank room for further monetary easing measures. The Indian Wholesale Price Index (WPI) stood at -0.91% for February 2016, consistent with previous months -0.90% inflation. A detailed analysis of the components shows that Inflation of Primary Articles declined to 1.58% year-on-year in February 2016 as against a decline of 4.63% in the previous month. Amongst Primary Articles, Food Articles inflation reduced to 3.35% year-on-year as against 6.02% in the previous month. The decline in Fuel & Power prices stood at -6.4% year-on-year in February 2016 as compared to -9.21% in the previous month. Inflation on Manufactured Products was at -0.58% year-on-year as against -1.17% in the previous month. Within this segment, prices of sugar grew by 4.16% year-on-year after being in the negative zone for over a year. As on March 22, 2016, the benchmark Index (Sensex) stood at 25,330.49. The earnings estimates for Infosys, the highest weighted stock in the index stood at 8.82%, 13.72% and 12.38% for FY16, FY17 and FY18. HDFC Bank, the next stock with the highest weightage, has an earnings estimate of 2.79%, 23.30% and 32.29% for FY16, FY17 and FY18 respectively. The top performers in the index during the month were Bharat Heavy Electricals Ltd (28%), Tata Motors Ltd. (26%) and State Bank of India (25%) while the top losers included Lupin Ltd (-12%), Coal India Ltd (-5%) and Sun Pharmaceutical Industries Ltd (-1%). According to consensus estimates, as on March 22, 2016, the estimated PE ratios for India’s stock market (Sensex) are 18.57X, 15.72X and 13.21X for FY 2015-16, 2016-17 and 2017-18 respectively. Estimated earnings growth is 6.62%, 18.08% and 19.04% for F2015-16, 2016-17 and 2017-18 respectively. We maintain an “Attractive” rating of 3.5 stars for the Indian market.

MARKETS REVIEW

INDIA – 3.5 STARS (ATTRACTIVE)

MARKET OUTLOOK

India’s exports fell by -5.66% y-o-y to USD 20.73 billion in Feb 16 while imports were lower by -5.03% to USD 27.28 billion during the same month.

Production at factories, utilities and mines contracted by -1.5% in Jan 16, as against Bloomberg’s estimate of a -0.5% decline.

Consumer Price Index (CPI) grew by 5.18% y-o-y in Feb 16, as against 5.69% y-o-y in the previous month.

WPI Inflation was at -0.91% y-o-y for Feb 16, as against the consensus estimate of -0.19%

Consensus estimated earnings growth for FY2015-16 and FY2016-2017 are 6.62% and 18.08% respectively.

SOUTH ASIA



PAGE 12

In March, Asian investors focused on probably one of the most important events of the year, which is the Chinese 12th Annual National People’s Congress (NPC) meeting held from 5 March 2016 to 14 March 2016. The meeting was particular important for Chinese investors for a glimpse on the future direction of the Chinese government’s policies. Not only did the government deliver its annual work report, this meeting also discussed about the country’s social and economic development blueprints for 2016 and the 2016-2020 periods. Despite the lack of surprises from the meeting itself, the plans reveals some of actual measures and upcoming growth targets on its economy for the upcoming 5 years. The first point in this meeting is the main target of the 13th Five-Year Plan, from 2016 through 2020. During the 4th session of the meeting, Premier Li Ke Qiang announced that from 2016 to 2020, China’s economy is expected to grow within the target range of 6.5% to 7.0%. The government shall work to maintain a medium-high rate of growth while at the same time; propel the development of industries toward the medium-high end. By 2020, China’s aggregate economic output is expected to exceed RMB 90 trillion, with the advanced manufacturing, modern services and strategic emerging industries as a proportion of GDP projected to rise significantly. The nation’s per capita labour productivity is also expected to rise from RMB 87,000 to RMB 120,000.These targets are relatively ambitious. However, the nation only slightly missed the growth target back in 1998 and 2015 based on the nation’s historical track record since 1996. As the nation revised down its target to a modest level of 6.5%, China might be able to achieve or even exceed the targets based on its strong track record. The main focus of the 13th Five-Year Plan is on structural reforms and improving the social wellbeing of its people. Official forecasts for the tertiary sector would contribute more to the economy from a GDP weight of 50.5% in 2015 to expand further to 56% by 2020. This implies that the tertiary sector in the upcoming 5 years would have to grow at a compounded annual growth rate of 8.7%, while the primary and secondary sectors growth rate would continue at a slower rate of 4%. Another important point was the tax reform which was mentioned in the meeting. The replacement of the existing Business Tax (BT) system with a modern Value Added Tax (VAT) system will go into effect from 1 May 2016, announced by Premier Li Keqiang. The change of taxation is expected to be beneficial to Chinese corporates as tax burden would partially pass on to consumers instead of solely burdened by the producers. Furthermore, corporates would enjoy further tax allowance as corporates can claim VAT credits for the services they purchase, implying an immediate reduction in the tax cost. The reduction of tax collections by the government has been reflected in this year’s fiscal deficit estimation. These measures are likely to cut government’s tax collections by more than RMB 500 billion this year. With the moderation of economic growth, tax reductions are positive news for enterprises and are expected to support corporates’ earnings in the upcoming months. As stressed in our previous view, we think rigorous stock picking would be the key to investing in China. As the divergence in sectoral performance may intensify in the year ahead, investors should pay extra attention to sector allocations when investing in Chinese equity funds as this will definitely make a noticeable difference in performance returns. Not only do we prefer the ‘new economy’ sectors, sectors that will benefit from China’s accommodative monetary policies, such as real estate developers, state-owned enterprises (part of the SOE reform plans), and high dividend pay-out stocks are also amongst our favoured sectors. Despite the recent rally in Greater China equities, indices are still currently trading at a relatively low level. As of 28 March 2016, the CSI 300 Index is currently trading at estimated PE ratios of 12.1X and 10.8X based on estimated earnings in 2016 and 2017 respectively, a discount to its fair value of 15.0X, while the HSML100 Index is trading at 8.9X and 7.9X (based on estimated earnings in 2016 and 2017 respectively) as compared to our fair PE of 13.0X as of 28 March 2016. We continue to favour the HSML100 Index, which has limited downside due to its cheap valuations relative to other equity markets around the world. Therefore, we maintain our 5.0 Stars — “Very Attractive” — rating for the offshore Chinese equity market. Taiwan is trading at estimated PE ratios of 13.26X and 12.24X based on 2016 and 2017 earnings estimates respectively, below our fair PE ratio of 15.0X. We maintain a 4.0 Stars — “Very Attractive” — rating for Taiwan. Lastly, the Hong Kong equity market is currently trading at 10.84X and 9.74X based on 2016’s and 2017’s estimated earnings, well below the fair PE ratio of 14.5X. Therefore, we maintain our 5.0 Stars — “Very Attractive” — rating for Hong Kong.

MARKET OUTLOOK

MARKETS REVIEW

GREATER CHINA China: Offshore (H) 5.0 Stars — Very Attractive, Onshore (A) 3.5 Stars — Attractive

GDP in 4Q 15 increased by 6.8% y-o-y, compared with a 6.9% y-o-y increase in 3Q 15

China 1-Year Lending Rate at 4.35% since 24 Oct 15

Caixin China Manufacturing PMI fell to 48.0 in Feb 16, up from 48.4 in Jan 16

Manufacturing PMI fell to 49.0 in Feb 16, up slightly from 49.4 in Jan 16

Exports decreased by -25.4% y-o-y in Feb 16, compared with a -11.2% y-o-y decrease in Jan 16

New loans increased significantly to CNY 726.6 billion in Feb 16, up from CNY 251.0 billion in Jan 16

CPI rose 2.3% y-o-y in Feb 16, up slightly from the 1.8% y-o-y increase in Jan 16

Taiwan: 4.0 Stars — Very Attractive

GDP in 4Q 15 fell -0.52% y-o-y, compared with a -0.28% y-o-y decrease in 3Q 15

CPI increased by 2.4% y-o-y in Feb 16, compared with a 0.81% y-o-y increase in Jan 16

Exports decreased by -11.8% y-o-y in Feb 16, compared with a -12.9% y-o-y slump in Jan 16

Export orders decreased by -7.4% y-o-y in Feb 16, compared with a -12.4% y-o-y decrease in Jan 16

Industrial production fell by -3.65% y-o-y in Feb 16 compared with a -5.65% y-o-y decrease in Jan 16

Nikkei Taiwan Manufacturing PMI in Feb 16 was at 49.4, down from a reading of 50.6 in Jan 16

Unemployment rate (seasonally-adjusted) was at 3.94% in Feb 16, up slightly from 3.91% in Jan 16

Hong Kong: 5.0 Stars—Very Attractive

GDP in 4Q 15 grew by 1.9% y-o-y, fell from a 2.2% y-o-y increase in 3Q 15

CPI stood at 3.1% y-o-y in Feb 16, up from 2.7% y-o-y in Jan 16

Retail sales decreased by -6.5% y-o-y in in Feb 16, as compared to a -8.5% decrease in Jan 16

Seasonal-adjusted unemployment rate in Feb 16 remained unchanged at 3.3%

Exports decreased by -10.4% y-o-y in Feb 16, as compared to a -3.8% y-o-y decline in Jan 16



PAGE 13

EMERGING MARKETS

MARKET OUTLOOK

MARKETS REVIEW

In South America, the earnings outlook of the Bovespa Index remained downbeat over the month of March, with estimated earnings for 2016 and 2017 downgraded by -3.0% and -1.3% respectively, while earnings for 2018 saw an upward revision of 3.4% (as of 28 March 2016). The energy sector as a whole saw its earnings slashed -32.7% over the course of the month, led by Brazil’s largest company Petrobras, which recorded its biggest ever quarterly loss in 4Q 15. The company’s deteriorating debt situation has also led analysts to see little potential upside in its earnings, especially if oil prices remain stubbornly depressed at current levels. On a brighter note, there were notable revisions in the materials sector, which saw its estimated earnings as a whole revised upward from negative to positive territory, albeit still at low levels, as a rally in iron ore prices by 12.4% to USD 55.76 per tonne in March has lifted the earnings estimates of companies such as Vale SA and Cia Siderurgica Nacional SA. Across the Atlantic in Russia, estimated earnings of Russian companies (as represented by the RTSI$ index) on aggregate saw upgrades over the month, with 2016’s estimated earnings revised 8.6% higher month-to-date, while 2017’s estimated earnings were upgraded higher by 7.4% (as of 28 March 2016). Year-to-date, Russian companies as a whole have seen their estimated earnings for 2016 revised slightly downwards by -0.9%, while 2017’s estimated earnings were upgraded 9.3% higher month-to-date. As a whole earnings are expected to grow by 1.4% this year, before growing by 28.5% in 2017 and 5.7% in 2018 (in RUB terms as of 28 March 2016). Energy titan Rosneft continued to see upgrades to its estimated EPS (+1.4% month-to-date), while Sberbank saw a 1.83% upward revision to its EPS month-to-date, as sell-side analysts continue to turn favourable on the Russian banking giant on a peak in NPL formation and improving asset quality.

Brazil saw its economy sink deeper into recession in 4Q 15, with GDP declining -5.9% year-on-year after a downward-revised -4.5% year-on-year fall in the previous quarter, the largest contraction since 1996 when Brazil started measuring GDP by the current system. For the full year, Brazil's economy shrank by -3.8% in 2015. Retail sales in Brazil saw a broad-based decline for the tenth consecutive month by -10.3% year-on-year, while industrial production also extended its decline by -13.8% year-on-year in January 2016. Meanwhile, inflationary pressures remain elevated, with the benchmark IPCA consumer price inflation index above the government’s official target range of 2.5 – 6.5% at 10.36% year-on-year in February 2016. The Copom maintained the Selic rate at 14.25%, citing inflation prospects, economic concerns abroad and at home as arguments behind its decision. The Copom's dovish stance is likely to continue, given the greater focus policymakers have placed on the risks to Brazil's economic growth. There were major political developments in March, with more than a million Brazilians taking to the streets to protest against President Dilma Rousseff, and Brazil's largest party announcing that it was abandoning the ruling coalition, sharply raising the odds of an impeachment and sending the benchmark Bovespa Index up by 18.8% (in BRL terms as of 28 March 2016) over the course of the month. Economists have reduced their forecasts for Brazil’s economic performance this year over the course of the month, with GDP growth for 2016 expected to come in at -3.66%, as compared to a -3.45% contraction forecasted in end February, as the economy struggles to regain traction amid poor consumer and business confidence.

Over in Russia, the Markit manufacturing PMI registered a 49.3 reading in February, down slightly from a prior 49.8 reading and missing consensus estimate of a 49.5 reading. On the other hand, the Markit services PMI reading registered a 50.9 reading in February, up from a 47.1 reading in January. The composite PMI came in at a 50.6 reading in February, up from a prior 48.4 reading. While services’ reading may have stabilised for the moment, manufacturing still remains weak in Russia. The Federal Statistics Service in Moscow reported that retail sales fell -5.9% year-on-year in February, improving from a -7.3% year-on-year decrease in January but was worse than the consensus estimate of a -5.0% year-on-year decline. On a month-on-month basis, retail sales fell -2.5%, coming in worse than the consensus forecast of a -1.5% decrease but improving from a prior -26.4% decrease. Both food and non-food items saw a decrease in sales in February from January. Real disposable income fell slightly worse than expected in February, while real wages fell -2.6% year-on-year (performing better than consensus forecasts). Disappointing data still highlights weak domestic demand and sluggish consumption. On the other hand, inflation has continued to trend downwards, with CPI rising 8.1% year-on-year in February, slowing from a prior 9.8% year-on-year increase. Core CPI rose 8.9% year-on-year in February, slowing from a prior 10.7% increase. While the recent cooling of inflation data has been attributed to a high base effect, it remains to be seen if disinflationary pressures could be brought about via slowing economic momentum, as what policymakers are expecting, given that the RUB still remains weak (against hard currencies like the USD). The Central Bank of Russia (CBR) has held its key policy rate at 11.0%, and stated that its “moderately tight” policy may last longer than previously expected – reluctant to shift to a more dovish stance on the prospect of any inflation risks intensifying. Policymakers are operating with the assumption and baseline scenario that Russia’s main export blend of crude (Urals) will average USD 30 per barrel, before rising gradually to USD 40 per barrel by end-2018 – time would be needed before conditions start to ameliorate across the board.

Despite Brazil’s economic woes, the Bovespa Index trades at estimated PE ratios of 14.2X, 10.3X and 8.3X for 2016, 2017 and 2018 respectively (as of 28 March 2016), as compared to its fair PE ratio of 11.5X. A star rating of 4.0 stars “Very Attractive” for Brazilian equities continues to be warranted at this juncture. On the other hand, the Russian RTSI$ index currently trades at estimated PE ratios of 6.3X and 4.9X for 2016 and 2017 respectively as compared to its fair PE ratio of 7.0X (as of 28 March 2016). On a price-to-book basis, Russian equities are trading at 0.6X book value – indicating the relatively beaten-down levels of the market. Volatility is still expected in the near-term as markets remain concerned over geopolitical tensions and issues, as well as the overall direction of oil prices. We retain Russia’s star ratings at 4.5 stars “Very Attractive.”

BRAZIL (4.0 STARS – VERY ATTRACTIVE)

GDP came in at -5.9% y-o-y in 4Q 15, down from -4.5% y-o-y in 3Q 15

Manufacturing PMI stood at 44.5 in Feb 16, down from 47.4 in Jan 16

Services PMI came in at 36.9 in Feb 16, down from 44.4 in Jan 16

Composite PMI fell to 39.0 in Feb 16, down from 45.1 in Jan 16

Retail sales fell by -10.3% y-o-y in Jan 16, after a downward-revised -7.2% decline in Dec 15

Industrial production fell -13.8% y-o-y in Jan 16, after a downward-revised -12.1% fall in Dec 15

IPCA inflation was at 10.36% y-o-y in Feb 16, down from a 10.71% y-o-y increase in Jan 16

Benchmark Selic rate at 14.25% in Mar 16

RUSSIA (4.5 STARS – VERY ATTRACTIVE)

Industrial production rose 1.0% y-o-y in Feb 16, up from a -2.7% decrease in Jan 16

CPI increased by 8.1% y-o-y in Feb 16, slowing from a 9.8% increase in Jan 16

PPI increased by 3.5% y-o-y in Feb 16, slowing from 7.5% rise in Jan 16

Retail sales fell -5.9% in Feb 16, after a -7.3% fall in Jan 16

CBR rate at 11.0% in Mar 16

CBR rate at 11.0% in Dec 15



PAGE 14

HKG BONDS BENCHMARK YEARS TO MATURITY

OFFER INDICATIVE YIELD (%) AS AT 30 MAR 2016

OFFER INDICATIVE YIELD (%) AS AT 29 FEB 2016

HKGB, Coupon 4.83%; Maturity 06/07/2016 2 year 0.19 -0.017 0.01

HKGB, Coupon 2.64%, Maturity 06/10/2019 5 year 3.20 0.808 0.787

HKGB, Coupon 4.65%, Maturity 06/29//2022 7 year 6.42 1.037 1.073

HKGB, Coupon 2.60%, Maturity 08/20/2024 10 year 8.40 1.149 1.184

HKGB, Coupon 2.39%, Maturity 08/20/2025 15 year 9.40 1.205 1.257 OFFER YIELDS INCLUDE SALES CHARGE OF 0.1% AND COMMISSION CHARGE OF 0.3%

SOURCE: IFAST FINANCIAL

OVERNIGHT 1-WEEK 1-MONTH 2-MONTH 3-MONTH 6-MONTH 12-MONTH

26-Oct-15 0.20 1.38 0.88 0.94 0.75 1.06 1.19

25-Nov-15 0.15 1.48 0.88 0.94 1.00 1.06 1.19

31-Dec-15 0.40 1.40 1.65 1.06 1.13 1.19 1.31

31-Jan-16 0.06 0.12 0.38 0.53 0.69 0.98 1.36

29-Feb-16 0.06 0.09 0.27 0.44 0.59 0.91 1.28

28-Mar-16 0.06 0.10 0.23 0.41 0.56 0.89 1.28

SOURCE: HKMA

COUNTRY / REGION PARAMETER CPI VALUE ON 31-JAN-16 (YOY)

CPI VALUE ON 29-FEB-16 (YOY)

BENCHMARK INTEREST RATES AS AT 29-MAR-16

US CPI 1.40% 1.00% 0.50%

Europe CPI 0.30% -0.20% 0.00%

Japan CPI 0.00% 0.30% 0.10%

Indonesia CPI 4.14% 4.42% 6.75%

Malaysia CPI 3.50% 4.20% 3.25%

South Korea CPI 0.80% 1.30% 1.50%

Hong Kong CPI 2.70% 3.10% 0.75%

Thailand CPI -0.53% -0.50% 1.50%

China CPI 1.80% 2.30% 4.35%

Taiwan CPI 0.80% 2.40% 1.50%

India WPI 6.32% 5.91% 5.75%

Singapore CPI -0.60% -0.80% 0.08%

*BENCHMARK INTEREST RATE HAS BEEN CHANGED SINCE LAST MONTH

BOND MARKET REVIEW

BONDS

HONG KONG INTERBANK RATES (HIBOR)



PAGE 15

BOND CHART OF THE MONTH

HKG Bond Yield Curve


Historical Yields of US Treasuries


Corporate Bond Spreads Against US 10-Yr Treasury


Historical Yields of HKG Bonds


BOND MARKET REVIEW

The US High Yield bond space has been under pressure since 2H 2014, as yields bottomed at 5.15% on 19 June 2014 and have seen a substantial rise that has thus far peaked at 10.38% on 11 February 2016. In comparison, although the European High Yield bond segment has seen yields likewise rise, the magnitude has not been as great as that seen in the US High Yield Space as yields have risen from 3.19% to 5.04% as compared to the US High Yield’s 8.74% yield-to-worst number (as of 30 March 2016). Even on an option adjusted spread basis, the European High Yield space is currently less attractive than their US counterparts, with the former registering a 539bps spread that pales in comparison to the 758 spread seen for those state side. While investors might be tempted to buy European High Yield in an attempt to ride on the latest European Central Bank’s easing measures, the US High Yield segment is the area that offers investors a better prospective return given its more attractive yield and spread against the risk free rate. While investors might worry over seemingly distressed areas like the energy and materials-related sectors for US High Yield, investors ought to note that energy-related high yield bonds constitute approximately 14% of the overall universe, while the materials sector comprise around 11.8%. With the bifurcation of the US High Yield bond market between the seemingly-distressed areas (like energy) and the healthier sectors and the current situation between the differently rated high yield bond segments delivering different returns, investment opportunities are thus dispersed, making an actively-managed approach vital in order to navigate the current market environment. An active approach will be able to go underweight or even avoid the riskier or seemingly-distressed areas of the High Yield market.



PAGE 16

BOND MARKET REVIEW

KEY DEVELOPMENTS

In Hong Kong, the CPI rose by 4.9% year-on-year in December 2014, down from 5.1% year-on-year in a month earlier. Netting out the government’s one-off relief measures, the inflation rate was 3.1% in December compared to 3.3% in November. The city’s CPI rose 4.4% year-on-year in the whole 2014. Food prices and prices of housing, together took up over 60% of the total CPI, climbed 3.1% year-on-year and 8.5% year-on-year in October. The Census and Statistic Department said the upside inflation risks will be limited in near term, as the soft international commodity prices will help to keep global inflation benign and local cost pressures should stay moderate.

Central bank policy changes saw the European Central Bank (ECB) announced yet another slew of easing measures in 1Q 2016, with March’s

policy meeting witnessing ECB President Mario Draghi firing his bazooka. Apart from yet again sending the deposit facility rate further into negative territory, the ECB also reduced the main refinancing operations rate to 0.00%. As for its unconventional monetary policy actions, the ECB has increased the amount of its asset purchase programme (APP) by EUR 20 billion to EUR 80 billion per month and expanded the range of instruments to include investment grade non-financial corporate bonds. Not content with rate cuts and enhancements to its APP, the ECB launched a new series of Targeted Longer-term Refinancing Operations (LTRO II) as it seeks to reinforce its accommodative policy stance and to strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. The combination of the rate cuts and the LTRO II has far reaching effects for banks who lend to the real economy as banks will be able to borrow up to 30% of the amount of loans made to Eurozone non-financial corporates and households (excluding mortgages) as of 31 January 2016 from the ECB at the prevailing main refinancing operations rate for 4 years, which currently stands at 0%. Should banks whose net lending increases by 2.5% by January 2018, they will receive the difference between the main refinancing rate and the deposit facility rate which translates into banks being paid a maximum of 0.40% by the ECB to lend!

Meanwhile in the US, the Federal Reserve kept interest rates unchanged but cited that “global economic and financial developments continue to

pose risks” to the US economy while lowering its projections for the Federal Funds rate from a prior 1.375% in December 2015 to 0.875%, in effect communicating that it expects to hike the benchmark rate by 2 times instead of 4 times (assuming a 25 bps hike in each meeting where a hike would be announced). Markets cheered the latest FOMC announcement, interpreting the news rather dovishly, with equity markets rallying and the USD weakening against many currencies despite its growth forecast likewise being cut.



PAGE 17

STAR RATINGS REVIEW & UPDATE FOR END 1ST QUARTER 2016

STAR RATINGS METHODOLOGY At the end of each quarter, we review our calls on the various regional and single-country equity markets under our coverage to assess each market’s attractiveness

as an investment proposition both on a standalone basis, as well as with respect to other markets. In our quarterly star rating exercise, we look at key valuation metrics like PE and PB ratios, expected earnings growth, as well as excess earnings yield to determine how attractive a particular market is. In addition, we consider the economic outlook utilising both consensus forecasts, as well as our own assessment of longer-term economic prospects. Our methodology not only incorporates both top-down and bottom-up forecasts, but also includes qualitative adjustments where necessary to achieve reasonable estimates of target upside for each market under our coverage over a 3-year horizon.

1Q 2016 REVIEW AND CHANGES TO STAR RATINGS 1Q 2016 started the new year off on the wrong foot, with financial markets around the world posting hefty declines that saw many indices entering ‘correction’ and ‘bear market’ territory as the sell-down ensured 2016 was the worst start to a year seen in just 10 trading days. Subsequent to the initial wave of selling seen in January and the first half of February, financial markets managed to find their footing and stabilised from the second half of February to end the quarter with significantly reduced losses. The MSCI AC World index capped the quarter with a loss of -1.2% after recovering from an initial drawdown of -11.5% while the JPMorgan Global Aggregate Bond Index delivered returns of 4.9% for the quarter (returns in local currency terms as of 29 March 2016). The dominant theme in 1Q 16 centred on fears of a global slowdown, the efficacy of monetary policy and potential negative effects of negative interest rates (triggered by the Bank of Japan’s foray into negative rates), concerns over European banks and the low commodity prices/threat of deflation, as well as issues from China. While negativity permeated the financial markets in the opening few weeks, central bank policy changes together with relatively positive economic data saw some of the fears abate and markets rebounded sharply. Central bank policy changes saw the European Central Bank (ECB) announced yet another slew of easing measures in 1Q 2016, with March’s policy meeting witnessing ECB President Mario Draghi firing his bazooka. Apart from yet again sending the deposit facility rate further into negative territory, the ECB also reduced the main refinancing operations rate to 0.00%. As for its unconventional monetary policy actions, the ECB has increased the amount of its asset purchase programme (APP) by EUR 20 billion to EUR 80 billion per month and expanded the range of instruments to include investment grade non-financial corporate bonds. Not content with rate cuts and enhancements to its APP, the ECB launched a new series of Targeted Longer-term Refinancing Operations (LTRO II) as it seeks to reinforce its accommodative policy stance and to strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. The combination of the rate cuts and the LTRO II has far reaching effects for banks who lend to the real economy as banks will be able to borrow up to 30% of the amount of loans made to Eurozone non-financial corporates and households (excluding mortgages) as of 31 January 2016 from the ECB at the prevailing main refinancing operations rate for 4 years, which currently stands at 0%. Should banks whose net lending increases by 2.5% by January 2018, they will receive the difference between the main refinancing rate and the deposit facility rate which translates into banks being paid a maximum of 0.40% by the ECB to lend! Meanwhile in the US, the Federal Reserve kept interest rates unchanged but cited that “global economic and financial developments continue to pose risks” to the US economy while lowering its projections for the Federal Funds rate from a prior 1.375% in December 2015 to 0.875%, in effect communicating that it expects to hike the benchmark rate by 2 times instead of 4 times (assuming a 25 bps hike in each meeting where a hike would be announced). Markets cheered the latest FOMC announcement, interpreting the news rather dovishly, with equity markets rallying and the USD weakening against many currencies despite its growth forecast likewise being cut.

The best performing markets for 1Q 2016 in SGD terms as of the time of writing (29 March) were the Brazil (+22.4%), Russia (+6.9%) and Thailand (+5.8%), while the worst performing markets were India (-8.8%), Hong Kong (-11.0%) and China (HSML100 (-11.6%), CSI 300 (-19.7%)).

MARKETS STAR RATINGS OUR 3 YEAR VIEW

Emerging Markets 5.0 Very Attractive

Asia ex-Japan 5.0 Very Attractive

Europe 3.0 (2.5) Attractive (Neutral)

US 2.5 (2.0) Neutral (Unattractive)

Japan 3.5 Attractive

SINGLE COUNTRY MARKETS STAR RATINGS OUR 3 YEAR VIEW

China 5.0 Very Attractive

Hong Kong 5.0 Very Attractive

South Korea 4.5 Very Attractive

Taiwan 4.0 Very Attractive

Russia 4.5 Very Attractive

Singapore 4.0 Very Attractive

Brazil 4.0 Very Attractive

Malaysia 3.0 Attractive

Thailand 2.5 (2.0) Neutral (Unattractive)

India 3.5 Attractive

Indonesia 2.5 Neutral

Source: iFAST Compilations



PAGE 18

At the end of each quarter, we review our calls on the various reg

Equities: US, Europe and Thailand Upgraded!

On 12 February, we upgraded the three equity markets due to valuation premiums having been erased thanks to the large drop in financial markets which saw the markets more fairly priced. While the markets have since seen a sharp rebound in prices (US +10.2%, Europe +7.8%, Thailand +9.1%) in local currency terms as of 29 March 2016, earnings have thus far failed to follow the upward trajectory of financial markets, resulting in valuations restoring much of the premium that was previously erased.

As of the time of writing (29 March 2016), the dreaded projected contraction in valuation multiples has re-appeared for the three markets. While we retain our current ratings on the markets, we are yet again monitoring valuations closely given the sharp rally and will not hesitate to downgrade markets should the need arise.

Fixed Income: Positive On High Yield

With valuations on aggregate more attractive than before, we turned positive on the US high yield bond market on 12 February 2016. Sporting a yield-to-worst of 10.38% and a spread of 920 bps as compared to its long term average of 582 bps (as of 29 March 2016), the US high yield bond market was significantly more attractive to when we downgraded the market in April 2014 when yields were just 5.36% and spreads were 366bps. While yields and spreads have compressed and tightened since our upgrade, they still warrant a favourable view on the fixed income segment. Sporting a yield of 8.74% and a spread of 736 bps as of 24 March 2016, the US high yield bond market is still attractive.

While investors might worry over seemingly distressed areas like the energy and materials-related sectors, investors ought to note that energy-related high yield bonds constitute approximately 14% of the overall universe, while the materials sector comprise around 11.8%. With the bifurcation of the US high yield bond market between the seemingly-distressed areas (like energy) and the healthier sectors and the current situation between the differently rated high yield bond segments delivering different returns, investment opportunities are thus dispersed, making an actively-managed approach vital in order to navigate the current market environment. An active approach will be able to go underweight or even avoid the riskier or seemingly-distressed areas of the high yield market.

As we have continued to advocate, riskier fixed income like high yield bonds should be combined with other safer bond segments, to ensure sufficient levels of diversification within the fixed income portion of one’s portfolio.

Still Neutral Equities Vis-À-Vis Fixed Income, Still Positive On Global Emerging Markets And Asia Ex-Japan

For 2Q 2016, we retain our neutral equities vis-à-vis fixed income as well as our preference for emerging and Asian equity markets relative to their developed market peers. Emerging and Asian markets with lower valuations provide a "margin of safety" for investors, helping to minimise the effect of a rise in the risk-free rate. Additionally, investors should also continue to remain diversified across asset classes and geographic markets, as various market segments may not move or respond similarly (in terms of direction and magnitude of move) to subsequent rate hikes by the Fed.



PAGE 19

REGIONAL STAR RATINGS US (2.5 Stars - Neutral) Why we like it

1. Economic fundamentals stable, lending support to corporate earnings growth

While slowing global economic momentum has weighed on US manufacturing, consumption is expected to be the key driver for

GDP, supported by an improving labour market and low energy costs

In an environment of positive economic growth, earnings are forecasted by consensus to grow by a 8.4% annualised rate by end-

2018 (as of 29 March 2016)

2. Strong brands, global reach and importance

Many US companies possess strong branding power; 8 out of the 10 most valuable brands of the world were US companies

(according to Forbes’ 2015 study)

A large proportion of the largest US companies derive significant proportions of revenue from overseas, allowing such companies

to benefit from global growth rather than being fully dependent on the domestic economy

Leading US companies still remain global leaders in various fields like technology (Apple, Google, IBM), finance (JP Morgan,

Citigroup), energy (Exxon Mobil, Chevron), consumer-orientated (P&G, Coca Cola, Amazon, Starbucks, Walt Disney) and even

healthcare (Johnson & Johnson, CVS Health) etc

3. Domestic growth drivers/trends

Other than a normalisation of the residential housing market, unparalleled access to cheaper energy prices (via the shale energy

revolution) should provide a competitive advantage for manufacturing and US companies

The US remains a key player in the global innovation scene, leading the way in digitalisation

What we don’t like

1. Valuations remain elevated, resulting in lower potential returns

On several valuation metrics, valuations of the US equity market remain relatively stretched at this current juncture. The

forecasted annualised return of US equities by end-2018 is one of the lowest among the markets we cover

2. Earnings growth vulnerable to a contraction of corporate profit margins

Profit margins of US companies remain high relative to historical averages (approximately 6.0%), may contract if labour costs

increase and the Fed continues on its monetary tightening stance as the US economy enters the later stages of the business

cycle

Earnings growth prospects will be affected if margins decline and revenue growth do not increase

3. Selected areas of “excesses” and “frothiness”

Signs of over-optimism have manifested in selected areas of the market – the recent IPOs of new-technology companies with no

profits calls to mind the more “bubbly” period of the stock market in the late 1990s

High valuations for small caps, certain technology sub-sectors and the healthcare sector are also areas of concern



PAGE 20

Europe (3.0 Stars - Attractive)

STAR RATINGS REVIEW

Why we like it

1. International Companies are sound, Bank fears appear overblown

MNC giants such as BMW, Siemens, Adidas, Carrefour and other well-known large caps are in good financial health and possess strong balance sheets

MNCs have exposure to overseas markets, the depreciation of the EUR will aid in making European products more competitive, boosting profits from exports

Banks appear to be solvent, confusion over profitability v solvency

2. Politicians have begun to move (slowly) towards further integration, focus on growth

Leaders in Europe have begun to focus on growing the Eurozone out of recession and away from their high debt-to-GDP ratios, rather than a pure focus on austerity

Focused austerity in the short term with growth policies being introduced to prevent austerity fatigue and right structural imbalances

ECB’s Outright Monetary Transactions should provide applicants with sufficient shelter from financial market stresses should it be needed

3. Domestic demand recovering, ECB Policy’s Attempt to Spur Lending

Domestic demand seems to be resilient, particularly with retail sales growing in recent quarters

PMIs have remained resilient despite souring sentiment

ECB’s QE has been enlarged, range of assets to be purchased broadened, negative deposit rate further lowered, banks can now be paid to lend

Why we don’t like it

1. Existing and New Reforms need to be implemented

Not all countries have implemented all the reforms previously promised

Some countries, e.g. Italy and France need to implement reforms to restructure their industries and work force and improve their efficiency and competitiveness

2. Valuations Getting Stretched Again, Market Sentiment

While the sharp decline in capital markets saw the projected contraction of valuation multiples play out, the sharp rebound has since yet again introduced a premium

Earnings estimates need to be revised upwards to reduce the valuation premium

Against an estimated fair PE of 13.5X earnings, 2016’s estimated PE of 15.2X is some way above estimated fair value

Current estimated PE of 13.4X (as of 24 March 2016) based on 2017’s estimated earnings shows the market has likely priced in 2017’s estimated earnings as well



PAGE 21

JAPAN (3.5 Stars – Attractive)

STAR RATINGS REVIEW

Why we like it:

1. Expansionary monetary and fiscal policies

As Japan’s wage growth for 2016 is looking to be minimal with the released of additional information regarding the Shuntō and as the JPY is still trading at a high value level of 113 per dollar, we still believe that a stimulus package expansion is coming soon for Japan, with high possibility that it will take place either in April or June

Putting the stimulus expansion’s effect on the real economy aside, the stimulus package expansion shall provide a temporary boost for investors’ confidence and recreate an upward momentum for the equity market as seen back in October to December last year.

2. Attractive Valuations

At the end of 2015, Nikkei 225 Index is already trading at 16.7X estimated PE ratio for FY2016, which is of a fairly large discount compared

to the 20X fair level, after the January and February slump, the estimated PE ratio once fell to around 14.6X in mid-February, in the past,

valuations undergo a prolonged period of rebound whenever such level is reached, the valuation is now at 15.5X – it has room for it to go

higher.

Why we don’t like:

1. Stimulus measures are not having its intended effect on the real economy

The ultimate goal for the BoJ and the Japanese government is to push up wages and capital investment so to start the economy’s engine and push inflation towards the 2% target. However now that the wage growth for 2016 is looking to be minimal and companies’ would rather perform share buybacks and issue dividends instead of investing in fixed assets, the stimulus may not work as intended.

2. The end of accommodative measures are approaching With the intended average remaining maturity of the Bank's JGB purchases being about 7-12 years, the bank is already close to buying all

JGB’s with maturity smaller than 15 years, it is estimated that the central bank may reach a situation of no available JGBs for them to buy by 2018 under the current scale. The government may delay for another year before considering quasi-sovereign bonds.



PAGE 22

Emerging Markets (5.0 stars – Very Attractive)

STAR RATINGS REVIEW

Why we like it: 1. Expected to have relatively stronger long-term economic growth trajectory

Healthier demographics, on-going trends of urbanisation and domestic consumption should drive long-term sustainable growth Emerging markets will likely post stronger economic growth compared to their developed market counterparts, which should imply

higher rates of earnings growth and stronger market returns Previously extremely reliant on exports for economic growth, emerging countries have been refocusing their economies towards

sustainable domestic consumption (e.g. China and India)

2. Attractive valuations & Huge Potential Upside The MSCI Emerging Markets Index trades at an estimated PE ratio of 12.2X and 10.6X for 2016 and 2017 respectively (as of 29

March 2016); these are still below its fair PE of 13.5X The estimated upside by end-2018 is 17.0% (annualised), representing significant upside potential, similar to Asia ex-Japan Significantly discounted compared to their developed market peers

3. Beneficiaries of a Potential Pick-up In Global Trade

A potential rebound in global trade should see Emerging Markets pick up steam, with commodity producers such as Brazil and Russia amongst those who should benefit

Why we don’t like it: 1. While Emerging markets have displayed increased resilience and have become more insulated against negative developments in the developed

markets, they are still not immune to developments in the West and are exposed to the weak global trade and low commodity price environment which has seen their earnings growth estimates revised downwards

2. Emerging Market governments have shown themselves to be unafraid of interfering with free market operations to curb inflation or to implement various policies; interference by governments have led to decreased profitability in various sectors such as utilities, telecommunications and financials, which has negatively impacted equity markets

3. The region still remains susceptible to geopolitical risk, as evidenced by events in Eastern Europe; political woes in South America and tensions

in the Middle East also serve as a reminder that geopolitical risks for emerging markets tend to be higher than their developed market peers

ASIA EXCLUDING JAPAN (5.0 STARS – VERY ATTRACTIVE) Why we like it:

1. Attractive Valuations While earnings have been revised southwards for Asia ex-Japan, they are expected to rebound and grow by 11.8% and 4.6% in 2017

and 2018 respectively (as of 29 March 2016) The estimated upside by end-2018 is 16.0% (annualised), representing significant upside potential, close to global emerging markets The MSCI Asia ex-Japan index trades at estimated PE ratios of 12.4X and 11.1X for 2016 and 2017 respectively, significantly below its

fair PE ratio of 14.5X

2. Global Economic Expansion To Benefit Asian Markets Economic momentum is likely to remain supported by recoveries in Europe and Japan while the US continues at a steady pace; and

with developed markets remaining supported, global trade could potentially be boosted with positive spill-over effects for Asia Asian exporters and export-oriented economies are poised to benefit from a potential pick-up in global trade, particularly those from

North Asia and other open-economies such as Singapore

3. High Potential Upside The high upside potential is a function of the region’s heavily weighted underlying markets such as China, which continues to trade at

extremely attractive valuations Significantly discounted compared to their developed market peers

Why we don’t like it: 1. While Asian markets have displayed increased resiliency and become more insulated against negative developments in the developed markets,

they are still not immune to developments in the West and are exposed to the weak global trade environment which has seen their earnings growth estimates reduced

2. Highly susceptible to capital flows as witnessed during the exodus of foreign capital in 2013 resulting in falling values of financial assets, and while the region’s capital flows have since stabilised, susceptibility to foreign capital outflows is a key source of asset price volatility for Asian assets

3. Asian countries that are driven by domestic consumption (which tends to be more resilient than exports) such as Indonesia have seen their valuations more than normalise, reducing their attractiveness. On the other hand, Asian countries that are heavily exposed to global trade have seen their exports fall as a result of a sluggish global environment, impacting their valuations. Should global trade fail to pick-up, the export-reliant Asian countries could be set to remain cheap for quite some time



PAGE 23

ASIA COUNTRY STAR RATINGS SINGAPORE (4.0 STARS – VERY ATTRACTIVE)

STAR RATINGS REVIEW

Why we like it: 1. Attractive valuations

On current forecasts (as of 29 March 2016), the Singapore equity market trades at estimated PE ratios of 12.9X and 12.2X for 2016 and 2017 respectively, representing a significant discount to our fair PE estimate of 16.0X for the Singapore market.

On a price-to-book basis, Singapore equities trade at an estimated PB ratio of just 1.08X, representing a discount to the long-term historical average of 1.41X.

2. Fairly attractive dividend yields

The estimated dividend yield on the STI for 2016 (as of 29 March 2016) is about 4.06%, and is expected to rise to 4.21% in 2017. While the estimated dividend yield is likely to come under pressure if market conditions deteriorate further, investors can still expect dividend yields to come in at 3.5 – 4.0% after factoring in our dividend adjustments.

3. Capturing Regional Growth

Even as the Singapore economy is not expected to grow as quickly as other Asian countries, Singapore companies have significant exposure to growth in other countries.

We estimate that almost two-thirds of the revenues of STI component companies are derived from outside Singapore, most of which are from the fast-growing Asian region.

Why we don’t like it:

1. Dependence On External Demand For Growth

With an absence of a large population base, economic growth is more susceptible to global economic conditions; economic growth tends to be leveraged on the external environment which can result in strong volatility for GDP growth rates.

In particular, manufacturing (which makes up a quarter of Singapore’s economy) remains susceptible to weakness in the global economy, which could weigh significantly on overall economic growth.

2. Central Bank’s Lack Of Control Over Domestic Interest Rates

Since the central bank utilises the SGD as a monetary policy tool, it lacks the ability to set domestic interest rates.

Movements in domestic interest rates are largely determined by US interest rates and the SGD. Domestic interest rates have jumped to its highest level since late 2008 following the Federal Reserve’s decision to raise the benchmark Fed Funds rate by 25 basis points.

3. Fairly Large Exposure To Property

While only approximately 19.4% of the benchmark index by market capitalisation is represented by property-related companies, we estimate that more than 60% of the index has some exposure to the property sector; this includes the three local banks, which have a fairly large domestic housing loan portfolio.

Headwinds for the sector remain in the form of numerous “cooling” measures as well as market interest rates that have started to rise, which already has had some dampening effect on property demand as well as prices; homebuyers are generally on floating rate mortgages which are susceptible to interest rate increases further down the road.



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STAR RATINGS REVIEW

Hong Kong (5.0 Stars – Very Attractive) Why we like it 1. Cheap valuation According to market consensus, as of 29 March 2016, the estimated PE ratios for the Hang Seng Index are at 10.8X and 9.7X for 2016 and 2017

respectively, below its fair PE of 14.5X.

2. Attractive dividend yield offers by Hong Kong blue chip stocks Hang Seng index constituent stocks offers one of the most attractive dividend yield in global context. As of 29 March 2016, Hang Seng Index offers

around 4.23% dividend yield.

3. Less currency volatility for investors who are using USD as base currency Currency movements remain a crucial investment factor in 2016. As the HKD is pegged with the USD, investors who are using USD as a base

currency would bear lower currency risks when compared to investing in other Asia ex Japan markets.

Why we don’t like: 1. Economy highly dependent on international trade and finance

The trading and logistics services industry contributed the most to both GDP contribution and employment. As a lot of major economies around the globe suffer from a slowdown, Hong Kong’s economy may subject to more headwinds from external environment.

2. Estimated earnings have been revised downwards

The earnings of local Hong Kong companies have been consistently downgraded especially on local retail sellers facing headwinds on decreasing mainland tourists which also weighs on rental income of local property developers.

3. High leverage in Hong Kong Mortgage Applications; A tipping point when the US tightens policy

The latest Hong Kong Residential Mortgage Survey’s reveal that outstanding loans grew 9.88% year-on-yearly to HKD $1072.4 billion. With the expectation of the US Federal Reserve continuing to hike rates, we any possible hikes later this year would negatively impact current mortgage owners and would affect investment sentiment of Hong Kong property developers stocks.



PAGE 25

STAR RATINGS REVIEW

China (5.0 Stars – Very Attractive) China A – 3.5 STARS (Attractive) Why we like it

1. Ambitious growth target for the 13th 5-year plan, especially for the tertiary sector

China’s economy is expected to grow within the target range of 6.5% to 7.0% to exceed RMB 90 trillion. The official forecast is for the tertiary sector

to contribute more to the economy from a GDP weight of 50.5% in 2015 to expand further to 56% by 2020, implying a compounded annual growth

rate of 8.7% for the next 5 years. The nation only slightly missed the growth target back in 1998 and 2015 based on the nation’s historical track

record since 1996.

2. Taxation Reform

The replacement of the existing Business Tax (BT) system with a modern Value Added Tax (VAT) system will go into effect 1 May 2016. The change of taxation is expected to be beneficial to Chinese corporates as the tax burden would partially pass on to consumers instead of solely burdened by the producers. Furthermore, corporates would enjoy more tax allowance as corporates can claim VAT credits for the services they purchase, which implies an immediate reduction in the tax cost.

3. Interest Rate Liberalisation

0、 With the floating range of interest rate bands, financial institutions in China have a greater autonomy to set depository rates which marks a great

symbolised move of giving Chinese financial institutions more pricing power on its rate products.

4. Opening up of domestic China market

Despite the recent sell off in the China market, the plan of opening up China’s capital market is still in progress. We believe the introduction of overseas investors and institutional investors to the domestic market would enforce more discipline and rationality in the market which would definitely be beneficial in the medium long term.

The Shanghai-Hong Kong Connect is regarded as the first step of internationalisation of the A shares market. With the successful deployment of the

AH Stock connect, we expect that the scheme may further expand to include the Shenzhen stock exchange and attract more institutional and

professional investors to the market. With more institutional and professional investors participating in the market, corporate governance,

information transparency and accounting standards will benefit the A shares market as a whole.

5. Attractive Valuations in H shares

The sell-off in the Chinese H-share market brought valuations to lower levels of the PE band territory, presenting an attractive upside as the equity

market continues to be supported by easing measures and reform measures. Valuations remain attractive. According to market consensus, as of

29 March 2016, the estimated PE ratios for the HSML100 Index are at 9.1X and 8.1X for 2016 and 2017 respectively compared to its fair PE of

13.0X for 2015. The estimated PE ratios for the CSI300 Index are at 12.5X and 11.1X for 2016 and 2017 respectively compared to its fair PE of

15.0X for 2015.


1. China A shares – heavy government intervention in the market

At end of June and beginning of July 2015, the Chinese had heavily intervened the equity market through various means. After half a year, the new “circuit breaker mechanism” had been introduced to the China A market in the beginning of 2016. Shortly after the negative market reaction to the new mechanism, the officials decided to discontinue the mechanism. The heavy government intervention of the market may create more uncertainty and fear surrounding the Chinese financial markets.

2. China secondary industries struggle amid economic slowdown

The Chinese secondary industries continue to signal weakness and the preliminary Caixin Manufacturing index remained at subpar level. Most of

the sub-indices of the manufacturing sector signal the weakness of industrial growth. With output and employment all decreasing at a faster rate

from the previous month. New orders and new export orders also accelerated its decline, suggesting weak domestic and external demand.

3. Deterioration in credit quality of mainland Chinese firms

Amid the slowing Chinese economy, credit qualities of some cyclically sensitive firms have deteriorated. According to a report issued from the

Standard & Poor’s Ratings Services, the firm believes the number of corporate defaults in China. The firm also cited that the increasing defaults in

China reflect weakening credit quality among corporates and the authorities’ increasing tolerance for defaults to occur in order to enforce market

discipline in capital markets.

4. Accommodative Monetary Policy may not be as aggressive as before

The mainland property market has a great start entering the year of 2016. In fact, some of the property prices in Tier 1 and 2 cities have recorded double digit growths on a year-on-year basis. As such, we believe that the central bank will take this factor (property price fluctuation) into consideration when they decide on whether to cut the benchmark interest rate further. This indicates that if the central bank opts to cut the interest rate further this year, the magnitude might not be as large as compared to last year.



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STAR RATINGS REVIEW

Taiwan (4.0 Stars – Very Attractive) Why we like it 1. Domestic demand remains healthy; Valuations look attractive

Domestic demand year-to-date remains healthy, with robust earnings growth for most of the non-exporters, Taiwan’s equity market is likely undervalued. As of 28 March 2015, the estimated PE ratios for Taiwan were at 11.85X for 2016 and 10.89X for 2017, which still traded at a discount when compared to our fair PE of 15.0X.

2. More sophisticated semi-conductors product offerings would be an edge for Taiwan semi-conductor producers

The worlds’ leading semi-conductors are located in Taiwan and Korea. Currently TSMC is producing 16nm FinFET node which serves as one of the world’s finest producer. The demand of such products would be more inelastic when compared to other lower- end conductors produced in EM Asia.

Why we don’t like it 1. Corporate earnings sensitive to changes in external demand

Taiwan is an export-oriented economy and corporate earnings are highly correlated with other major economies like China, the US, Europe and Japan. Uncertainties surrounding the pace of the global economic recovery especially in Europe, Japan and China may weigh on Taiwan’s economy and corporate earnings outlook.

2. Corporate earnings downgrade might persists for some time

Corporate quarterly earnings have continued to be downgraded since the middle of 2015 as exporter order from major trade partner continue to contract. On a year-to-date basis, 2016 and 2017 earnings were revised downward by -4.06% and -4.67% (as of 28 March

2016). We expect that the deterioration in earnings may worsen if the weakness in global economy growth persists.



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STAR RATINGS REVIEW

SOUTH KOREA (4.5 STARS – VERY ATTRACTIVE) Why we like it:

1. Booming retail sales

Previously we have mentioned that we are likely to see a rebound on market sentiment and consumption when MERS fear subsides, the

forecast has now came alive, the country’s retail sales is experiencing a positive year-on-year growth ever since July 2015, and on average

the retail sales growth is of 4.7% year-on-year for the past 5 months ending Jan 2016.

2. Increasing number of tourists attracted to South Korea

China, Korea’s biggest source of tourists as it represents 48.5% of the inbound tourists in February 2016, has seen a 5.7% growth year-on-

year in Feb 2016 and market is expecting on annual basis, number of Chinese tourists will jump by 28%.

Most of the Chinese tourists are targeting Cosmetic products, with beauty brands’ producers like AmorePacific and LG Household &

Healthcare likely to be the biggest beneficiaries. Notice that Cosmetics, together with food and household appliances, saw the fastest growth

in terms of retail sales growth recently.

Why we don’t like:

1. Weak export as impacted by the sluggish Chinese economy

Korea’s exports has recorded a 14-month consistent shrinkage as of end of February 2016, mainly thanks to the ever-dropping Chinese

demand. With around 26% of Korea’s total exports, exports towards China has fallen by -12.9% year-on-year in February. With the market

now expecting China to slow to 6.5% year-on-year GDP growth, it is unlikely for us to see a rebound in Korea exports anytime soon.

The continuously shrinking export means the economy now needs to rely heavily on domestic consumption to support its economy, which would be reliant on consumer sentiment and household spending.

2. High household debts

Dated as Mid-August 2015, when Korea’s GDP has been growing at an average speed of 3.67% over the past 5 years, household debt is

growing at an average rate of 8.11%, debt-to-income ratio has reached 160% by the end of 2014 and it is still growing as of now.

The high level of household debt is now limiting the Bank of Korea’s ability to carry out further monetary easing, March 2016 will be the ninth

month that the BoK left the key interest rate unchanged and Governor Lee Ju Yeol has already voiced out its concern of the rate cut’s

effectiveness.



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STAR RATINGS REVIEW

MALAYSIA (3.0 STARS – ATTRACTIVE) Why we like it

1. Growth remains reasonably decent

Malaysian economy could still see decent growth in 2016 (4.0% to 4.5%), supported by robust investment spending arising from on-going infrastructure projects and an improvement in exports performance amid weak ringgit.

2. Institutional liquidity to support local equity market

Strong participation of institutional funds within the local market will continue to serve as a buffer to cushion market performance should any selloff occurs.

The announcement of a RM20 billion capital injection by ValueCap came as a boost to market confidence, and the gradual injection of capital into the market should support equity market performance in 2016.

3. Possible portfolio inflows on undervalued Ringgit-A tailwind to local equity market

According to Bank for International Settlements, the real effective exchange rate for Ringgit is standing at 87.07 as of end February 2016. This indicates Ringgit could be undervalued by 13%, which may appear to be attractive enough to induce foreign investors to flow back into the equity market, serving as another positive factor that could drive equity market performance in 2016.


1. Inflation to remain elevated

With a low base effect from weak oil price as well as an upward adjustment in toll rates, rail fares and electrical tariffs, inflation is likely to remain elevated in 2016. The on-going fiscal consolidation could see further tariff hikes and removal of subsidies, which will contribute to a higher inflation rate moving forward.

Higher inflationary pressure may weigh on domestic consumption- the key driver of the economy that constitutes more than half of the Malaysia’s GDP. On top of that, businesses will likely to experience higher operating costs, which may not be passed on entirely or immediately amid weak consumer sentiment- a risk factor that could affect margin negatively moving forward.

2. Constrained monetary and fiscal policy

In terms of monetary policy, any move to cut rates could lead to greater portfolio outflows and place additional pressure on the battered currency. High household debt also suggests that central bank will likely be more cautious in cutting rates further as such a measure will encourage more borrowing in the system. In addition, higher inflationary pressure from a rate cut is also a concern. Thus, unless the economy falters more than expected, it is unlikely to see a policy rate cut in 2016.

As government remains committed to fiscal consolidation amid weak oil prices, the government will have a limited room for fiscal spending without exceeding its budget deficit target and debt ceiling, which could risk a sovereign credit ratings downgrade.

3. Elevated debt level-A structural challenge to growth

In 2015, debt to GDP ratio for Malaysia is estimated to be 247.9%-a level similar with some developed economies. While high level of debt does not always signal looming disasters, it suggests a structural challenge to growth, as rapid credit expansion to boost growth could risk debt sustainability while deleveraging would result in moderating growth. We see the latter being a more possible outcome.



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STAR RATINGS REVIEW

INDONESIA (2.5 STARS – NEUTRAL) Why we like it

1. Encouraging fiscal reforms

Since September 2015, the government has implemented a series of economic stimulus packages with the aim to revive the nation’s stalling economy. These stimulus packages mainly target to achieve 5 goals, a) improve investment, b) boost consumption and business activities, c) stabilise currency, d) accelerate fiscal spending and e) enhance efficiency and productivity.

Introduction of measures such as reduction of red tape, loosening of investment restrictions on various industries, expedition of project approvals, wage hike scheme, tax waivers, tax incentives and tariff cuts are positive for consumption, government spending and investment. The nation’s economic growth is likely to be supported going forward with the implementation of these fiscal init iatives, with the main drivers being government spending and investment.

Pick-up in government spending should have some positive spill-over effects to investment. The kick-start of infrastructure projects will help to address the challenge of poor infrastructure faced by the nation in its attempts to accelerate its economic growth. Government spending has been on the rise, with the latest reading (4Q 15) showing a 7.3% year-on-year growth after a 7.1% year-on-year growth in 3Q 2015. Investment also grew at a rate of 6.9% in 4Q 15, as compared to 4.8% in 3Q 15.

2. Adoption of pro-growth monetary policy

Since the beginning of 2016, Bank Indonesia has slashed its benchmark interest rate thrice, from 7.5% to 6.75%, on the back of lower inflation and a relatively stable Rupiah. With manageable inflation and stable currency movement, we believe that Bank Indonesia will have the room to cut its interest rate further, if necessary, to lift the nation’s economic growth.

CPI has moderated substantially since 2H 2015, declining towards 4.4% in February 2016 from a high of 7.3% in June 2015. In 2016, inflationary pressure is likely to be limited due to the high base effect amid fuel subsidy removal in late 2014.

Rupiah movement has been rather stable since the government’s active intervention in the spot and forward market. On a year-to-date basis, rupiah has strengthened by 5.3% against the greenback.

3. Heightened risk on “Fed rate hike cycle” tampered

Indonesia’s position in weathering the Fed rate hike cycle has turned better with the introduction of various stimulus packages. The nation was able to weather the first hike relatively well as evidenced by the tepid volatility seen in the currency market and equity market.

Market expectations on the heightened risks of the nation have moderated, as evidenced by the moderation of government bond yields. Government bond yields across all durations have declined by 150 basis points on average even as the Fed kick-started its rate hike cycle. Current account deficit also narrowed to -2.1% in 2015 as compared to -3.1% recorded in 2014.


1. Corporate earnings downgrade might persists for some time

Corporate quarterly earnings have continued to fall short of market expectation for 4Q 2015, with an aggregate earnings surprise of -15.5%, marking its seventh consecutive quarters of earnings disappointments. After hefty earnings downgrades (double-digit cuts) in 2015, analysts have continued to slash Indonesia’s corporate earnings number in 2016. On a year-to-date basis, 2016 and 2017 earnings were revised downward by -2.9% and -3.3% (as of 24 March 2016). Going forward, although we do not expect earnings downgrades of similar magnitude as seen in 2015, we do believe that corporate earnings downgrade might persist for some time amid downward pressures on earnings in certain sectors such as Energy, Materials and Consumer Staples (plantation specifically).

Possible situation: With the various fiscal initiatives introduced by the government, which are supportive for consumption, investment and government spending, we might potentially see some positive spill-over effect to corporate earnings. This should lead to corporate earnings stabilising and trend upwards, which is a positive for Indonesia’s equity market.

2. Expensive valuation

As of 28 March 2016, the Indonesian equity market traded at a PE ratio of 16.6X, relatively higher as compared to our fair PE estimate of 14.0X. While dividends and earnings are expected to drive equity market returns in Indonesia, the annualised expected returns for this market is likely to be weighed down by the expected annualised contraction in valuation multiples.



PAGE 30

STAR RATINGS REVIEW

Thailand (2.5 STARS- NEUTRAL) Why we like it

1. Accommodative monetary policy and stimulus package to boost economic growth

Easy monetary conditions are supportive for domestic demand and economic growth. The central bank is likely to be accommodative as it remains firm on utilising available monetary policy measures to support the economic recovery as well as to maintain long-term financial stability

Introduction of various stimulus packages, via easy financing to SMEs and low-income groups and the expedition of government infrastructure projects, should be able to bolster the nation’s economy.

With Thailand’s strategic location in South East Asia, infrastructure upgrades would improve connectivity and trade between its neighbours like Cambodia, Laos, Malaysia and Myanmar, which have increasingly begun to adopt market-based economic policies for economic growth.

2. Tourism industry to drive economic growth

Tourism industry contributes almost 10% of the nation’s GDP growth. After the military takeover of the government, tourism industry has recovered and enjoyed tremendous year-on-year growth of 20.4% in 2015.

With accommodative monetary policy, baht is likely to stay weak. Baht weakened by -5.0% against the USD since 2015 (as of 28 March 2016). This should continue to attract more foreign investors to the nation and drive the growth in the tourism industry and tourist-related sectors.


1. Tepid upside potential

Upside potential for the next three years is estimated to be one of the lowest among the markets under our coverage (5.3%), making Thailand relatively unattractive compared to other cheaper Asian markets, especially in the North Asia region.

2. Political uncertainty still lingers

Although the martial law has been lifted, it has been replaced by a special security measure, known as Article 44, which gives the military forces more power. This allows the Thai junta to exercise necessary actions (arrestment and detainment without court warrant), which is deemed to be undemocratic and undermine the citizen’s human rights.

A draft of new constitution has been rejected by the military forces, effectively lengthening military control and pushing back the time frame for an election (earliest by 2017) that will return democracy to the kingdom.

3. Deteriorating exports and consumption continued to weigh on GDP growth

The deterioration in exports growth, particularly due to the decline in soft commodities prices and dampening demand from its major trading partners, has hurt the nation’s economic growth; Exports make up almost 70% of the kingdom’s GDP. With the soft commodities prices unlikely to mean-revert in the near term, exports are likely to be weak and this is expected to weigh on the kingdom’s economic growth for the subsequent quarters

Consumption has been sluggish owing to the slump of commodity prices. Agricultural sectors provide income to almost 35% of the nation’s labour force. The hefty declines in commodity price, especially rubber and rice, have dented farmers’ income and resulted in a reduction of consumer spending during the quarters and is expected to be so going forward.

The Bank of Thailand has lowered its 2016 growth projection to 3.1% from 3.5%; this marks the 3rd time that the central bank has cut its 2016 growth projection.



PAGE 31

STAR RATINGS REVIEW

India (3.5 STARS- ATTRACTIVE) Why we like it

1. Fiscal prudence and low inflation could be the triggers for a rate cut

The Government in the Union Budget presented on February 29, 2016 made it very clear that they would adhere to fiscal prudence. The fiscal deficit would be maintained at 3.9% and 3.5% in RE 2015-16 and BE 2016-17. This was despite the increase in the plan expenditure and the provisions made for the Seventh Pay Commission. Dr. Rajan has been on a wait and watch mode to see how the Government will go about the fiscal consolidation agenda that would be laid out in the Budget. This, along with the fact that the inflation represented by CPI has been below the 6% level should give some confidence to the RBI to ease the monetary policy stance in the coming months.

2. Passage of some crucial bills in the Parliament

During the first session of the Parliament which started on February 23, 2016, the Government was able to pass 2 major bills that is, Aadhaar Bill (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) and the Real Estate (Regulation and Development) Bill, 2016. The first bill will mean that the Government will save on the subsidy cost while the second bill will bring in a real estate regulator which will make this sector more favorable to the buyers.

3. Attractive Valuations

According to consensus estimates, as on March 22, 2016, the estimated P/E for India’s stock market (Sensex) are 18.57X, 15.72X and 13.21X for FY 2015-16, 2016-17 and 2017-18 respectively. Estimated earnings growth is 6.62%, 18.08% and 19.04% for F2015-16, 2016-17 and 2017-18 respectively.


1. Global Uncertainty

Global uncertainties will continue to have an impact on India. The weakness in the Chinese market and the depreciation of the currency has already had an impact on the country. Depressed commodity prices have negatively affected our commodity companies. India remains vulnerable to the risk caused by capital outflows from emerging markets on account of any uncertain events in the global economy.

2. Rising NPAs in the Banking System

The gross NPAs of the banking system have been rising and the RBI has asked banks to clean up their balance sheets by March 2017. This has been a big problem as it has affected credit growth. According to the RBI, over the calendar year 2015, the non-food credit growth from public sector banks (PSBs) grew at only 6.6 per cent, while industrial credit growth was only 3.3% and growth in lending to agriculture and allied lending was only 10.4 per cent. We believe that it is the PSBs which will lend to the infrastructure sector and if they have huge stressed assets, then their capacity to lend to this crucial sector will get affected. This will inturn have a negative effect on the overall economy.



PAGE 32

STAR RATINGS REVIEW

Brazil (4.0 stars –Very Attractive) Why we like it

1. Attractive Valuations The Brazilian market (as represented by the Bovespa Index) is trading at forward PE ratios of 14.2X, 10.3X and 8.3X projected

earnings for 2016, 2017 and 2018 respectively (as of 28 March 2016), offering investors a total potential annualised return of 16.2% by end 2018, with dividends reinvested.

2. Active Central Bank

The central bank has been supporting the local currency, the Brazilian Real, via currency purchase programs in an attempt to reduce imported inflation.

It has hiked the benchmark Selic rate by a total of 200 basis points in 2015, a move to rein in inflation and add credibility to the central bank’s perceived independence.

3. Secular Growth Story Still Intact

While Brazil’s economy currently face cyclical headwinds, its long-term structural growth story as an emerging market still remains intact. With positive demographics, long-term investors would still find that there are many opportunities for growth

Brazil remains amongst the more attractive investment destination amongst Latin American nations despite a sharp slowdown in its economy.

4. Strong Foreign Currency Reserves Position

Brazil is able to service its debt obligations due to its strong foreign currency reserves of USD 371.7 billion (as of end February 2016) that represents a comfortable buffer of more than six times its short-term external debt.

Why we don’t like it

1. Heavy Trade Dependence On Europe And China

China accounts for approximately 19% of Brazil exports. The restructuring of China’s economy towards consumption and off exports has seen imports of primary products from Brazil fall

Europe accounts for approximately 18% of Brazil’s exports; a slow recovery in the continent is not helping exports growth from Brazil, especially as Europe is China’s largest export destination.

2. Government Intervention, Political Crisis

The government’s policies and intervention in the private sector has damaged business confidence and has led to lower levels of investment. Continued intervention in the private sector via the restriction of raising prices for various goods (e.g. utility prices and oil prices) has hurt companies such as Petrobras and Eletrobras. Government interference in the market place could continue despite Dilma Rousseff proclaiming to be more market oriented in her second term

Brazil’s widening fiscal budget deficit has cost the nation its prized investment-grade rating, as S&P's and Fitch Ratings have downgraded the nation's foreign currency sovereign debt rating to junk. The situation is unlikely to improve given the current political stalemate that has complicated the implementation of austerity measures. Joaquim Levy was also replaced by new Finance Minister, Nelson Barbosa, seen as an austerity opponent.

3. Over-reliant On Domestic Consumption

Trend of strongly rising retail sales in the past has been fuelled by fiscal transfers by the government and rapid credit expansion by public banks. Further fiscal transfers without harming the government’s balance sheet are unlikely.

Domestic consumption has been negatively affected as Brazil’s economy remains mired in recession. A quick recovery is unlikely due to elevated inflation, costly credit and a worsening labour market.

Previous rates of high credit growth might be unsustainable given that much of the recent lending has been done by public banks and not private sector banks.

4. Corruption Scandal Involving Petrobras

Petrobras is the largest company in Brazil and is the nation’s single biggest source of investment, supporting a huge network of suppliers and construction activity. This has given it the power to influence Brazil’s economy.

The corruption scandal has set off a chain effect in the Brazilian economy, from massive job losses to major cutbacks on infrastructure investment, threatening to tip an already weakened Brazilian economy deeper into recession.

EMERGING MARKETS COUNTRY STAR RATINGS



PAGE 33

STAR RATINGS REVIEW

Russia (4.5 stars –Very Attractive) Why we like it

1. Very Attractive valuations

Russian equities (represented by the RTSI$ index), currently trade at estimated PE ratios of 6.3X and 4.9X for 2016 and 2017 respectively, as compared to its fair PE ratio of 7.0X (as of 28 March 2016). On a price-to-book basis, Russian equities are trading at 0.6X book value – indicating the relatively beaten-down levels of the market.

2. Active Government Support For the Economy

The government has instituted a variety of measures that includes providing support to the banking sector as well as the vital energy sector.

Various measures that include new parameters of tax manoeuvres for petrochemical projects, reduction of export duties for oil exporters as well as a progressive and revenue-based taxation system in place continue to lend support to the energy sector in Russia given the current tough environment of both low energy prices as well as a weak RUB.

3. Policymakers Expected To Ease Monetary Policy Once Conditions Are Conducive

While Russia’s central bank did not make any changes in its latest policy in March 2016, policymakers are expected to continue monetary easing to stimulate economic conditions in Russia once they are confident that inflationary trends are within their targets.


1. High Reliance On Commodity-Related Businesses

Being a commodity exporter, Russia’s economic outlook is highly correlated to the fate of commodity markets like crude oil, natural gas, and various sorts of base and industrial metals that the country exports. Lower energy prices affect export revenues of the country.

2. Geopolitical Risks Remain Elevated

Investment sentiment remains poor as economists and investors monitor the geopolitical situation in Eastern Europe as well as Russia’s relations with the West. Sanctions have been in place for close to 2 years – hampering economic growth and a return to normalcy.

3. Corporate Earnings Expected To Be Weak

With sluggish macroeconomic conditions and still relatively high financing costs in the country, the outlook of corporate earnings growth on aggregate remain clouded. Deleveraging has happened in 2015, and domestic loan activity and credit demand thus remain weak. Consumption is also expected to remain weak as inflationary pressures remain elevated.

Documents

MONTHLY MORNING MEETING APRIL 2016€¦ · 14 BOND MARKET REVIEW 17 STAR RATING PRESENTED BY IFAST FINANCIAL (HK) LTD p5. USA p11. Singapore p13. Malaysia p9. Indonesia p9. Thailand