Beware: Singapore to suffer significantly from global growth slowdown

A combination of potential earnings downgrades and strong trailing performance is likely to limit market performance from the current levels through December 2011. In an environment of a slowdown in global growth, we think absolute valuations are likely to track historical averages, with limited likely re-rating potential.

This is contrary to our earlier expectation of potential earnings upgrades and PER re-rating, particularly for the Indonesian market. However, we introduce our index targets for December 2012, which imply upside/(downside) of 15%, 10% and -5% for MSCI Indonesia, Thailand and Singapore, respectively, through December 2012 from the current levels.

• Relatively Defensive in Singapore: Singapore is likely to be the most significantly impacted by a slowdown in global growth. We recommend that investors to stay away from high-beta sectors, such as Industrials and Property. We continue to prefer Singapore’s Banks and Telecoms as relative defensive sectors.

• Overall ASEAN Strategy: Within ASEAN, Indonesia continues to be our most preferred market, and Singapore our least preferred market. We believe that the Thailand equity market’s performance will also be contingent on how long the country enjoys political stability. Considering the strength of the current government’s mandate in Thailand, we are upgrading Thailand to Neutral from Negative.

• Play Structural Domestic Story in Indonesia: We believe that Indonesia’s domestic structural story is likely to remain largely intact, despite a potential global growth slowdown. However, our previously anticipated earnings upgrades and valuation re-rating are unlikely to materialize in an environment of a global growth slowdown.

We recommend that investors view potential market corrections as an entry opportunity. Our key OW sectors to play the structural story in Indonesia are Financials, Consumer Discretionary and Industrials.

• Relative Hedge against Political Volatility in Thailand: Thailand’s equity markets are likely to outperform ASEAN markets during periods of political stability, and vice versa. Given the challenge in predicting political outcomes, we recommend that investors stay OW in sectors that are likely to be least impacted by Thailand’s political volatility, i.e., Energy, Utilities and Consumer Staples.