Yesterday, China indices led the global rally with a 4.6% surge on the CSI 300 Index and 5.4% in the SGX China A50 futures index. Call warrants over the latter spiked, notably, with FTSECHINAA50 7800 MBECW131030 (S3PW) gaining a whopping 60%, on which holders exited from 783,000 warrants.

In Singapore, the STI finished strongly, at its intra-day highs of 3,248.9, +1.9% for the day. The market’s top traded STI call STI 3250 MB ECW130830 (S1IW) saw investors sell back 320,000 of the warrant.

Prior to yesterday’s stock market performance of the two indices, Macquarie Equities Research (MER) had published a research report titled “Reviewing Tactical Portfolio” on 10 July, stating their viewpoint on China and Singapore, amongst others. Below are some excerpts:

China– “catching knifes”
As MER had discussed in the past, there is a distinct possibility that China might eventually end-up with very low GDP growth rates, high debt levels and declining reserves sometime before 2016-17. The combination of over-investment, “technology-frontier” induced decline in productivity and negative demographics is likely to converge broadly in the same narrow time zone. The only way out of this “Japanese-style” predicament is either a strong sustained global recovery (unlikely) or accelerated reforms, which would be hard but not impossible.
 
Currently China requires as much as US$4-5 of debt for every US$ of GDP and as much as US$6 of investment. This is unsustainable, particularly as national leverage already exceeds 250%. However, China still has several “bullets left in the barrel”, including some fiscal  flexibility as well as accelerated reforms and forced but controlled deleveraging. Also unlike most emerging markets, China has limited degree of international capital vulnerability. As GDP growth rate expectations slip below 7%, with rising chance for sharper contraction, earnings per share estimates are bound to continue to come under pressure.
 
However, valuations have corrected and China is far from the only emerging market facing rising risks and volatility. MER maintains that so long as the global economy does not stall, China‟s reform package beats low expectations and People’s Bank of China manages to calibrate liquidity, China should relatively outperform ASEAN.
 
ASEAN – solid long-term choice but limited upside
MER maintains that over the longer term, ASEAN economies are far better positioned and more balanced whilst facing less need for surgical re-structuring (vs challenges facing China).

However, most ASEAN economies have an extended credit cycle and have a higher than average degree of exposure to contraction (absolute and/or relative) in flow of cross-border finance, foreign direct investment and portfolio investment. ASEAN is also facing complex choices presented by appreciating US$ (ie freezing domestic economy or depreciating currency). Hence, MER expects continuation of the current high degree of volatility in both capital and currency markets, with Indonesia and Malaysia being potentially the most effected.
 
At the same time, ASEAN markets continue to look “overbought” from a funds flow standpoint (with the exception of Thailand) whilst in most cases valuation multiples remain at least one standard deviation above the mean. MER maintains their view that Thailand is the best short-term choice (MER has moved from a Neutral to an Overweight position) and remain Underweight the rest of ASEAN (principally Malaysia, Singapore and Indonesia).

Source: Macquarie Research - 12 Jul 2013