Global Financial Update v2

WANT TO KNOW FUTURE?

SURE.

SEPTEMBER 11, 2013

TI EMSPECIAL REPORT: THE POPULARITY OF CWM DESIGNATION

CHARTERED WEALTH MANAGER

FELLOWSHIP DINNER

SEPTEMBER 11, 2013 MANILA, PHP

19th November 2012

18th January 2013

On November 6 2012, Obama became the first Democratic president since Franklin D. Roosevelt to twice win the majority of the popular vote and being elected as President.

2013 unfolds with Taliban story …… Burma and then to Europe.

February & March … was consumed with Pope and issues around church

April …mixed bag

May …Japan, Gen Y

June from tornado ..to china …to informers

July … a twist. Buddhist Terror. Happiness. Back to Egypt.

August & September …. As it unfolds

Cyprus Spain Greece Italy

Portugal

India

Indonesia

Australia

Brazil Currency

China

Russia

Japan

UK

Ireland

PIGS PIGS Portugal | Italy | Greece | Spain


PIIGS Portugal | Italy | Ireland | Greece | Spain

BRIC Brazil | Russia | India | China

VIEWS 6 INVESTMENT

1997 AGAIN? ASIA

The recent sharp sell-off in emerging market (EM) debt and currencies has raised investor concerns that Asia could see a repetition of the financial crisis in 1997–1998.

NO 1997 AGAIN? ASIA

Will Asia see a repetition of the 1997 financial crisis?

WHY?

1997 AGAIN? ASIA

ASIA IS IN MUCH BETTER SHAPE NOW THAN IN 1997

Improvement in current account balances

Higher level of foreign exchange reserves

Lower dependence on external debt

More flexible currency regimes

IMPROVEMENT IN CURRENT ACCOUNT BALANCES HOW DOES IT HELP ?

Current Account Balance Net of ‘Exported’ and ‘Imported’ goods and services, plus the net flow of income from investments and employment. A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments.

Singapore and Hong Kong, 3 September 2013 Asia Pacific

Global Research Investment horizon: 6 – 12+ months

Important disclosures are found in the Disclosure appendix Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be

aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this

report as only a single factor in making their investment decision. For a discussion of the risks of investing in the securities

mentioned in this report, please refer to the following Internet link: https://research.credit-suisse.com/riskdisclosure

1997 financial crisis redux for Asia?

Asia is in much better shape now than in 1997

The recent sharp sell-off in emerging market (EM) debt and

currencies has raised investor concerns that Asia could see a

repetition of the financial crisis in 1997–1998. While the

recent sell-off in the Indonesia rupiah (IDR) and the Indian

rupee (INR) has been extremely sharp, we do not think that

this marks the start of a wider contagion that will lead to a

region-wide capital flight similar in scale to that seen in the

1997 Asian financial crisis (AFC). With the exception of India

and Indonesia, the external balances and macroeconomic and

financial fundamentals of most Asian economies have seen a

substantial improvement since 1997 (Figure 1). More

specifically, there have been some positive developments

since 1997, which have helped to significantly reduce Asia’s external vulnerability.

(1) Substantial improvement in current account balances – One basic measure of the health of a country's

Figure 1 Sharp improvement in current account balances of most Asian

economies since the 1997 Asian financial crisis

-10

-5

0

5

10

15

20

IN ID TH HK CN MY PH KR TW SG

1996 2013F

Current account (% of GDP)

Source: IMF World Economic Outlook Database April 2013, Credit Suisse

Research Weekly Asia Will Asia see a repetition of the 1997 financial crisis?

Private Banking

Highlights

We do not think Asia will see a repetition of

the 1997 financial crisis due to the

substantial improvement in current account

positions and FX reserves of most Asian

economies, while the region's dependence

on foreign financing has fallen.

According to our external vulnerability

scorecard, India and Indonesia are most

vulnerable to capital outflows, while China

and the Philippines are least vulnerable.

We favor Asian equity markets with strong

external balances and FX reserves and stay

overweight on Taiwan and Hong Kong. We

see tactical opportunities in China due to its

strong surpluses and growth stabilization.

We underweight equities in Indonesia and

India, given their high external vulnerability.

We remain negative on the IDR and the

INR and avoid local currency bonds in these

two countries.

Top investment ideas

FX: Stay negative on the IDR and the INR, with 3M and 12M USD/IDR forecasts at 11,000 and 11,300 and 3M and 12M USD/INR forecasts at 66.0 and 68.0, respectively. We are positive on the CNY and forecast USD/CNY at 6.10 in 3M and 6.00 in 12M.

One basic measure of the health

of a country's external

balance is the current

account balance.

1

POINT §  Balance of payments (BoP) in India, Indonesia, Malaysia and

Thailand have deteriorated markedly in recent years.

§  Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets.

§  Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas.

§  Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.

HIGHER LEVEL OF FX RESERVES HOW DOES IT HELP ?

Impart of FX reserve A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify.

The level of foreign exchange

(FX) reserves determines the

extent to which a country can

maintain stability in the value of its currency during times of capital

outflows.

Singapore and Hong Kong, 3 September 2013

2

external balance is the current account balance. In simple terms, it measures the difference between a country’s exported and imported goods and services, plus the net flow of income from investments and employment (e.g., workers’ remittances). A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments.

As shown in Figure 1, many Asian countries prior to the AFC were running current account deficits that were between 0% and 5% of the gross domestic product (GDP). Despite running current account deficits, most Asian countries were able to maintain stable exchange rates until 1997, as prospects of strong growth and high interest rates helped these economies attract foreign investment capital. However, when investment sentiment suddenly turned in 1997 and external financing conditions became more difficult, the current account balances could not adequately cushion the exchange rate weakness when capital flight intensified.

But in the wake of the AFC, weaker exchange rates have helped improve the competitiveness of Asian economies, making exports cheaper for foreign importers. Together with the proactive policy support of Asian governments, this has allowed many countries to expand their export sector further. Consequently, most Asian economies now post current account surpluses because of higher exports, with Taiwan and Singapore having the largest surpluses (as % of GDP) in the region (Figure 1).

That said, we highlight that the balance of payments (BoP) in India, Indonesia, Malaysia and Thailand have deteriorated markedly in recent years (Figure 2). Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets. Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas. Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.

(2) Much higher level of foreign exchange reserves – The level of foreign exchange (FX) reserves determines the extent to which a country can maintain stability in the value of its currency during times of capital outflows. A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify.

The painful experience of 1997 drove many Asian countries to increase their precautionary holdings of FX reserves over the past two decades. As illustrated in Figure 3, the level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997. However, the increase in Indonesia and India’s FX reserves has been fairly negligible.

Nevertheless, we also note that in the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies. (3) Lower dependence on external debt financing and lower degree of currency mismatch in corporate balance sheets – One factor which aggravated the negative impact of the AFC was Asian countries’ heavy reliance on external financing. In the mid-1990s, Asian companies, banks and governments borrowed heavily in foreign currency terms, assuming the fixed exchange rate regimes would hold. The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments). When the crisis unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers.

Asia’s dependence on short-term external financing has fallen significantly over the past two decades. That said, we note that Asia has nonetheless become more dependent on foreign portfolio flows to help finance investment plans. While equity investments dominated the 2000s, foreign investors’

Figure 2 Figure 3 Balance of payments in India, Indonesia, Malaysia and Thailand deteriorates in recent years

Most Asian economies now have a bigger stock of FX reserves to counter currency weakness

-10

-5

0

5

10

15

20

25

93 95 97 99 01 03 05 07 09 11 13

India Indonesia Thailand Malaysia

Basic Balance (C/A + net FDI), % of GDP

10

13

23

26

29

38

39

40

83

91

107

0 20 40 60 80 100 120

Indonesia

India

Japan

Korea

Philippines

Thailand

China

Malaysia

Taiwan

Singapore

Hong Kong

Dec-1997 Current

in % of GDP

Source: CEIC, Credit Suisse

Source: DataStream, Bloomberg, Credit Suisse

The level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997

2

POINT §  The increase in Indonesia and India’s FX reserves has been

fairly negligible.

§  In the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies.

LOWER DEPENDENCE ON EXTERNAL DEBT HOW DOES IT HELP ?

External Debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country.

One factor which aggravated the negative impact of the Asian Financial Crisis (AFC) was Asian countries’ heavy reliance on external financing.

What happened in AFC? ①  In the mid-1990s, Asian companies, banks and governments borrowed heavily

in foreign currency terms, assuming the fixed exchange rate regimes would hold.

②  The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments).

③  When the AFC unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers.

3

POINT §  Asia’s dependence on short-term external financing has fallen

significantly over the past two decades. §  NOTE - Asia has nonetheless become more dependent on

foreign portfolio flows to help finance investment plans. §  Equity investments dominated the 2000s, foreign investors fixed

income investments picked up after the 2008 global financial crisis. However, these fixed income investments are mainly dominated in local currency.

§  The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly.

§  As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997.

§  Reduced duration mismatch.

§  Equity Investment; not debt.

§  Debt in local CCY.

§  Better duration & FX management

§  Safer for economy

MORE FLEXIBLE CURRENCY REGIMES HOW DOES IT HELP ? What happened in AFC? ①  Prior to the AFC, economies such as

Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD).

②  These countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy.

4 Singapore and Hong Kong, 3 September 2013

3

fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable

The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.

In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the

potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.

In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest

The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.

Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *

700

0

100

200

300

400

500

600

94 95 96 97 98 99

Indonesia Korea Thailand Malaysia

USD exchange rate against local currency (1994 = 100)

External vulnerability assessment (ratio of FX reserves to potential outflows)

0100200300400500600700800900

1000110012001300

ID IN MY TH KR HK SG TW PH CN

%

Source: Bloomberg, DataStream, Credit Suisse

* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse


3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%




3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%




3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%




3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%



POINT §  Most Asian countries now adopt a managed float regime,

with varying degrees of currency flexibility across countries.

§  Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions.

§  The increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices.

§  Managed float vs Fixed pegged exchange rate.

§  Greater Flexibility – on top of matter.

§  Less complacent

VULNERABILITY & SAFEST ASIA IS MANY MARKETS

Which countries are most vulnerable? ①  The expected tapering of the US Federal

Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years.

②  Investment Research (Credit Suisse) presented an external vulnerability scorecard – that compares the ratio of FX reserve relative to each Asian country’s external financing needs, including the potential risk of portfolio outflows.

Summary Singapore and Hong Kong, 3 September 2013

3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%



POINT §  India and Indonesia are most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows for both countries is less than 100%. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies.


3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%



§  The next two weakest countries are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries.

POINT §  The two strongest countries are China and

the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows.

§  Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively.


3








700

0

100

200

300

400

500

600

94 95 96 97 98 99




0100200300400500600700800900

1000110012001300


%



MAKING THE POINT


4

Dennis Tan, [email protected]

Mitigate external vulnerability risks in our Asian strategy

Fed tapering heightens sensitivity of Asian equities to external vulnerability risks

After the Federal Open Market Committee (FOMC) meeting in May ignited the QE tapering debate, EM bonds and EM currencies have come under selling pressure in the past three months as a result of capital outflows from the weaker EM with deteriorating current account deficits and balance of payments. Fundamentally, it is more challenging for countries with large current account deficits and external debt to finance their external requirements when US yields are rising and QE-driven liquidity is unwinding.

The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India,

Indonesia, Brazil, South Africa and Turkey. As our central scenario predicts that the Fed will start tapering bond purchases from September, the trend of capital outflows from the indebted countries is unlikely to reverse soon. Underweight current account deficit markets: Indonesia and India

Since 31 May, the MSCI Asia ex-Japan has dropped 7.5%, underperforming the 0.6% gain of the MSCI World. India and the TIP markets (Thailand, Indonesia and the Philippines) have led the declines in the Asian equity markets, driven by currency depreciation and capital outflows associated with rising US bond yields on Fed tapering concerns (Figure 6). The Sensex has dropped 10% from its 20 May high after the Indian government introduced emergency liquidity tightening measures to curb the sharp declines of the INR (Figure 7), adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the

Table 1: External vulnerability assessment for Asian economies (ratio of FX reserves to potential outflows under more challenging external financing conditions*) (Figures in USD bn) CN HK IN ID KR MY PH SG TW TH

Current account + net FDI* A 346.0 -10.1 -82.0 -16.9 49.6 0.7 17.0 81.0 38.9 2.2

Short-term external debt** B 611.7 60.2 191.3 89.9 160.6 85.5 19.5 141.9 128.0 81.1

Total external financing requirements (TEFR) C = A + (-B) -265.7 -70.3 -273.3 -106.8 -111.0 -84.8 -2.5 -60.9 -89.1 -78.9

30% of total foreign portfolio inflows since 2010 D 34.9 20.4 25.7 6.9 18.7 19.8 6.3 0.5 2.0 7.0

TEFR + portfolio outflows E = C +(-D) -300.6 -90.7 -299.0 -113.7 -129.6 -104.6 -8.8 -61.3 -91.0 -86.0

Total FX reserves F 3,497 300 273 88 375 144 86 261 409 195

Ratio of FX reserves to potential outflows F/E 1163% 331% 91% 77% 289% 137% 979% 426% 449% 227%

Ranking (1 = best, 10 = worst) 1 5 9 10 6 8 2 4 3 7

* 2013 forecasts based on annualized figures of H1 2013 data. ** By residual maturity and including amortization of long-term debt. Excluding banking sector debt for Hong Kong and Singapore due to their status as financial centers. Source: CEIC, Bloomberg, IMF, Reserve Bank of India, Bank Indonesia, Credit Suisse

Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD

Performance

-20

-15

-10

-5

0

5

Japa

n

Kor

ea

Chi

na

MS

CIA

sia

Pac

ific

Aus

tralia

Hon

g K

ong

Taiw

an

MS

CIA

sia

ex J

apan

Sin

gapo

re

Mal

aysi

a

Thai

land

Phi

lippi

nes

Indi

a

Indo

nesi

a

-17.4-10.4

-8.2

-7.7

-4.8

-4.2

-4.1

-3.2

-0.1

1.8

-16-15-14-13-12-11-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4

USD/INR

USD/IDR

USD/PHP

USD/MYR

USD/THB

USD/SGD

USD/KRW

USD/TWD

USD/HKD

USD/CNY

% returns YTD

Source: Bloomberg, Credit Suisse



4

Dennis Tan, [email protected]

Mitigate external vulnerability risks in our Asian strategy

Fed tapering heightens sensitivity of Asian equities to external vulnerability risks

After the Federal Open Market Committee (FOMC) meeting in May ignited the QE tapering debate, EM bonds and EM currencies have come under selling pressure in the past three months as a result of capital outflows from the weaker EM with deteriorating current account deficits and balance of payments. Fundamentally, it is more challenging for countries with large current account deficits and external debt to finance their external requirements when US yields are rising and QE-driven liquidity is unwinding.

The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India,

Indonesia, Brazil, South Africa and Turkey. As our central scenario predicts that the Fed will start tapering bond purchases from September, the trend of capital outflows from the indebted countries is unlikely to reverse soon. Underweight current account deficit markets: Indonesia and India

Since 31 May, the MSCI Asia ex-Japan has dropped 7.5%, underperforming the 0.6% gain of the MSCI World. India and the TIP markets (Thailand, Indonesia and the Philippines) have led the declines in the Asian equity markets, driven by currency depreciation and capital outflows associated with rising US bond yields on Fed tapering concerns (Figure 6). The Sensex has dropped 10% from its 20 May high after the Indian government introduced emergency liquidity tightening measures to curb the sharp declines of the INR (Figure 7), adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the

Table 1: External vulnerability assessment for Asian economies (ratio of FX reserves to potential outflows under more challenging external financing conditions*) (Figures in USD bn) CN HK IN ID KR MY PH SG TW TH

Current account + net FDI* A 346.0 -10.1 -82.0 -16.9 49.6 0.7 17.0 81.0 38.9 2.2

Short-term external debt** B 611.7 60.2 191.3 89.9 160.6 85.5 19.5 141.9 128.0 81.1

Total external financing requirements (TEFR) C = A + (-B) -265.7 -70.3 -273.3 -106.8 -111.0 -84.8 -2.5 -60.9 -89.1 -78.9

30% of total foreign portfolio inflows since 2010 D 34.9 20.4 25.7 6.9 18.7 19.8 6.3 0.5 2.0 7.0

TEFR + portfolio outflows E = C +(-D) -300.6 -90.7 -299.0 -113.7 -129.6 -104.6 -8.8 -61.3 -91.0 -86.0

Total FX reserves F 3,497 300 273 88 375 144 86 261 409 195

Ratio of FX reserves to potential outflows F/E 1163% 331% 91% 77% 289% 137% 979% 426% 449% 227%

Ranking (1 = best, 10 = worst) 1 5 9 10 6 8 2 4 3 7

* 2013 forecasts based on annualized figures of H1 2013 data. ** By residual maturity and including amortization of long-term debt. Excluding banking sector debt for Hong Kong and Singapore due to their status as financial centers. Source: CEIC, Bloomberg, IMF, Reserve Bank of India, Bank Indonesia, Credit Suisse

Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD

Performance

-20

-15

-10

-5

0

5

Japa

n

Kor

ea

Chi

na

MS

CIA

sia

Pac

ific

Aus

tralia

Hon

g K

ong

Taiw

an

MS

CIA

sia

ex J

apan

Sin

gapo

re

Mal

aysi

a

Thai

land

Phi

lippi

nes

Indi

a

Indo

nesi

a

-17.4-10.4

-8.2

-7.7

-4.8

-4.2

-4.1

-3.2

-0.1

1.8

-16-15-14-13-12-11-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4

USD/INR

USD/IDR

USD/PHP

USD/MYR

USD/THB

USD/SGD

USD/KRW

USD/TWD

USD/HKD

USD/CNY

% returns YTD



ALTHOUGH THERE ARE VULNERABILITIES;

ASIA WILL NOT FACE 1997 AGAIN

VIEWS 6 INVESTMENT

1997 AGAIN? ASIA

IDEAS 6 INVESTMENT #1 FI: CREDIT, NOT DURATION

In view of current economic environment, do not take duration mismatch risk, for conservative investors invest in:

§  1-3 years duration (Short dated)

§  Good Quality

AA- to BBB financials and

A to BB non-financials (excluding autos)

§  Could consider - CHF, EUR, GBP and USD.

§  Cash will give near-zero yields in most markets.

§  Debt default rates expected to remain stable in 2014. Corporate bonds of short maturities offers a reasonable yield pick-up versus cash.

§  After the recent rise in yields, valuations of medium-term bonds have improved but rate volatility is likely to remain very high.

§  Conservative investors should continue to focus on short (1-3 year) investment grade bonds.

Fixed Income

IDEAS 6 INVESTMENT #2 EQUITIES; TAKE PROFIT

§  Global growth is likely to accelerate.

§  The US clearly remains the leader of the recovery and exposure to the US is the cornerstone of the recovery theme.

§  However, due to increased short-term risks and a strong performance, take profit in US consumer and US recovery stocks.

§  European economic data are looking on the positive side. European stocks may start to look increasingly attractive.

§  Asia, wait & watch.

Equities

§  Take profit on US consumer and US recovery stocks.

§  Buy M&A stocks.

§  Lookout for European Recovery Stocks

§  Wait & Watch Asian Equities

IDEAS 6 INVESTMENT #3 DIVIDENDS & BEYOND

§  A defensive theme for investors who are interested in absolute returns and have expectations of relatively high cash flow disbursements from dividends.

§  Fundamental drivers for equity yield remain

§  However, due to current market environment, be cautious to Convertibles.

§  Consider taking profit on the emerging market and APAC at this time due to increased short-term risks.

Equities

§  Selectively buy high-dividend-yielding stocks and stocks generating high free cash flow and hold, but do not add to global convertibles.

IDEAS 6 INVESTMENT #4 GAS & OIL

§  Higher crude oil prices should disproportionately benefit oil and gas companies with new exploration technologies or that have interest in unexploited shale gas, tight oil or deep water oil sources, since these are becoming increasingly attractive and profitable the higher the crude oil price is.

§  Due to the volatile market environment, take profit on this high beta idea at this time.

Equities

§  Take profit on upstream energy stocks.

IDEAS 6 INVESTMENT #5 US REAL ESTATE

§  US homebuilding stocks and real estate investment trusts (REITs) have underperformed in recent weeks.

§  Rising long-term interest rates were the main trigger for the drawdown.

§  This sector is expected to provide positive performance, however, real estate is unlikely to outperform overall stock markets in such an environment.

§  Selectively, US REITs continue to offer attractive investment opportunities to investors looking for defensive dividends.

Alternative Investments

§  Exit listed real estate investments.

IDEAS 6 INVESTMENT #6 THE NEW HARD CURRENCIES

§  In the near term, the high volatility of 10-year US yields is weighing on emerging market currencies.

§  An improvement in the external environment and the now higher carry should attract renewed capital inflows.

§  CNY still has upside potential, but is nearing a peak.

§  Diversify into only a few selected emerging market currencies.

Foreign Exchange

§  Hold selected emerging market currencies funded in EUR, USD or GBP..

IDEAS 6 INVESTMENT

ARE GATHERED FROM VARIOUS SOURCES.

Investors should NOT consider this presentation as solicitation for any investment products. Aprikot is not involved in any business of selling or buying securities or any investment products. The investment ideas are

personal ideas of the presenter, who is not a broker nor a financial advisor. Investments carry risks.

Global Financial Update v2

Economy & Finance

Transcript of Global Financial Update v2