Market Update January 28th 2012

Economic Outlook
Currency debasement is especially sensitive in Asia
While central banks in advanced economies are making concerted
efforts to boost their economies through increasingly loose
monetary policies, some current account deficit countries’ sizeable
financing needs or high inflationary pressures would welcome the
benefits of liquidity injection and capital inflows from advanced
But in some external-demand driven economies in Asia, the initial
benefits in boosting demand and risk assets could eventually be
outweighed by the costs in terms of managing capital flows,
financial stability and the potential loss of external competitiveness
if there is excessive pressure on real effective exchange rate
The more cyclical yet industrialized economies such as Korea,
Singapore and Taiwan may be more sensitive to yen movements
and the risks to external competitiveness. As Citi analysts expect to
the yen to weaken further to ¥90-¥95 against the dollar, exports
from Korea, Singapore and Taiwan, are likely to feel the most
competitive heat from a significant weakness in the yen versus their
currencies. But in Singapore’s case, financial stability/property risks
are serious enough concerns to make the MAS unlikely to loosen
monetary policy via weakening the SGD band. Korea and Taiwan
could take some comfort if they see better US-led global growth
prospects in 2H13 alongside gradual CNY appreciation, which
might lead them to take some breath and let their currencies adjust
as well.

Risk to earnings, but not excessive expectations
Investors highly regard earnings growth and tend to place
excessive importance on a certain level of earnings. They believe
that in order to have a bull market the market needs earnings
growth to do well. But history tells a different story. Out of the seven
major bull markets in Asia ex since 1975, four had less than 8%
annualized earnings growth during the duration of the bull run. In
Asia ex a bull run occurs on the back of multiples expansion – a
belief in a better tomorrow, not an acceleration in actual earnings
growth rates.
Actually the trend rate of earnings growth in Asia ex since 1990 has
been only 5.1% in US$ terms and the markets are pricing off an 8%
EPS growth rate rather than the 13% expected by the consensus.
In terms of earnings growth by market, the highest earnings growth
rate forecasts are out of Taiwan, Korea and Thailand which have a
sizable cyclical component. The least aggressive 2013 earnings
forecasts are for Singapore, Malaysia, China and Hong Kong,
between 2.5% and 10.3% for 2013. On a sector basis, financials
offer the lowest growth rate in the region, at just 3%, followed by
telecoms at 7.0% and then energy at 7.6%. This stands in stark
contrast with consumer durables at 38%, transport at 36% and the
broad technology space at over 30%.

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Symbol Bid Ask Spread
EURUSD 1.17570 1.17590 2
GBPUSD 1.28220 1.28250 3
USDCAD 1.25380 1.25410 3
USDJPY 109.320 109.340 2
USDCHF 0.96750 0.96780 3
AUDUSD 0.79210 0.79240 3
NZDUSD 0.72940 0.72990 5
EURGBP 0.91680 0.91710 3
EURCHF 1.13770 1.13800 3
EURJPY 128.540 128.570 3
AUDJPY 86.590 86.640 5
GBPJPY 140.170 140.230 6
XAUUSD 1286.60 1287.00 40
XAGUSD 16.965 16.979 1.4