Sector Rotation Strategies in Asia: Which Sectors Are Best Positioned to Benefit from Recovery?

Transcription

1 Sector Rotation Strategies in Asia: Which Sectors Are Best Positioned to Benefit from Recovery? Mark Killion, CFA Group Managing Director World Industry Service

2 Agenda Outlook for in Sectors and Industries Rankings of Leading and Lagging Industries Real Versus Nominal, Sales Versus CapEx, Impact from External Trade Barometer of Industries Best Positioned for Recovery Implications for Investment Rotation Strategy Copyright 00 IHS Global Insight. All Rights Reserved.

3 Macro Economic Drivers for Industry 0% in GDP and CapEx Japan 0% in GDP and CapEx ROW (excl Japan) % % Percent 0% % 0% 0% % 0% Percent % -% -0% -0% Real GDP Nominal GDP (Domestic Currency) Nominal CapEx (Domestic Currency) Real GDP Nominal GDP (US$) Nominal CapEx (US$) Copyright 00 IHS Global Insight. All Rights Reserved.

4 Sector Composition of Macro Economic Annual Percent of Sector Real Value Added Japan Rest of the World Annual Annual -.% - Construction & Utilities Manufacturing Services Construction & Utilities Manufacturing Services Copyright 00 IHS Global Insight. All Rights Reserved.

5 Ranking of Outlook for Sector Composites: Japan Annual Rate of Sector Value Added in Real (Inflation Adjusted) Terms Ranked by Value Added Forecast in 00, Japan Japan United States ROW Aircraft and Spacecraft -.%.%.% -0.%.%.%.%.%.%. Medical and Healthcare.%.%.%.%.0%.%.% 0.%.%. Publlic Sector & Education 0.% 0.%.%.%.0%.%.%.%.%. Electrical & Electronics.% 0.0%.%.% 0.%.%.%.%.%. Food and Agriculture 0.% -0.%.0%.%.%.%.%.%.%. Computing and R&D Services.% -0.%.0%.% -0.%.%.% 0.%.%. Consumer Oriented Industries.% -.0%.0%.% -.%.%.% 0.%.%. Business Services.% -.%.%.% -.%.%.% -0.%.%. Chemicals (excl. Pharma) -0.% -.%.% -.% -.%.%.% 0.%.0% 0. Telecommunications -0.% -.%.%.% -0.%.%.%.%.%. Transport & Logistics (inc. Equip.) 0.% -.%.% -0.% -.0%.%.0% 0.%.%. Paper and Pulp -0.% -.%.% -.% -.% 0.%.% -0.%.%. General & Spec. Indus. Machinery -0.% -.%.% -.% -.% 0.%.% -.0%.%. Motor Vehicles, Trailers & Parts.0% -.%.% -.0% -.%.% 0.% -.%.%. Media and Entertainment -.% -.%.% -.0% -.%.%.% -.%.%. Energy Complex 0.% -.%.%.0% -0.%.%.% 0.%.%. Metals & Related Mining Complex -0.% -.%.% -.% -.% 0.%.%.%.%. Banking and Finance -.% -.%.% -.% -.%.%.% -0.%.% Accelerating Decelerating Copyright 00 IHS Global Insight. All Rights Reserved.

6 Which Industries Will Show the Fastest Real? (Industry Ranking of Rates in Inflation Adjusted Sales) Top Real Performers Among ISIC Industries Ranked by Forecast Rate in Sales (Real, CAGR 00-0) Ranking in Japan (Strongest is Ranked ) Top 0 among ISIC Industries Share in Real GDP CAGR* 00-0 CAGR* 00-0 World Ranking in Other Regions/Countries (Strongest is Ranked ) U.S. Western Europe OECD Asia excl. Japan China India. Health Care Services.... Semiconductors, Circuit Boards, etc..... Aircraft and Spacecraft Transmitters, Routers, Telephony Receivers, Players, Sound Systems Computing and Related Services Energy Mining Railroads and Equipment Shipbuilding Sanitation, Trade Organizations * CAGR: Compound Annual Rate Copyright 00 IHS Global Insight. All Rights Reserved.

7 Which Industries Show the Slowest Real Sales? (Industry Ranking of Rates in Inflation Adjusted Sales) Most Modest Real Performers Among ISIC Industries Ranked by Forecast Rate in Sales (Real, CAGR 00 0) Ranking in Japan (Weakest is Ranked ) Weakest 0 among ISIC Industries Share in Real GDP CAGR* 00-0 CAGR* 00-0 World Ranking in Other Regions/Countries (Weakest is Ranked ) U.S. Western Europe OECD Asia excl. Japan China India. Motorcycles, Bicycles, Related Wood Products (ex. Furniture) Watches and Clocks Furniture, Jewelry, Toys, Musical Textiles and Apparel Mineral Products (excl. Glass) Glass and Products Construction Insurance and Pensions Publishing * CAGR: Compound Annual Rate Copyright 00 IHS Global Insight. All Rights Reserved.

8 Which Industries Show the Fastest Nominal Sales? (Industry Ranking of Rates in Nominal Domestic Currency) Top Revenue Performers Among ISIC Industries Ranked by Forecast Rate in Sales (Nominal Domestic Currency, CAGR 00 0) Ranking in Japan (Strongest is Ranked ) Top 0 among ISIC Industries Share in Real GDP CAGR* 00-0 CAGR* 00-0 World Ranking in Other Regions/Countries (Strongest is Ranked ) U.S. Western Europe OECD Asia excl. Japan China India. Health Care Services.... Education.... Aircraft and Spacecraft Public Admin. and Defense Computing and Related Services.0... Food, Beverages & Tobacco Railroads and Equipment Utilities Shipbuilding Engines and Turbines * CAGR: Compound Annual Rate Copyright 00 IHS Global Insight. All Rights Reserved.

9 Global Capital Expenditure in Principal Sectors CapEx Shares in Sector Output and Nominal CapEx Outlook 0% % % % % 0% % % % % Share of CapEx in Total Sales Average 00-0 % % % % 0% -% -% -% -% Outlook of Nominal CapEx % Energy Hi-Tech Goods Medical & Healthcare All Sectors -0% Energy Hi-Tech Goods Medical & Healthcare Infrastructure Infrastructure All Sectors Japan United States ROW Japan(Domestic Currency) United States (US$) ROW (US$) Copyright 00 IHS Global Insight. All Rights Reserved.

10 Which Industries Show Fastest in Capital Expenditures? (Industry Ranking of Rates in CapEx in Domestic Currency) Top Investment Performers Among ISIC Industries By Forecast Rate in CapEx (Nominal Domestic Currency, CAGR 00 0) Ranking in Japan (Strongest is Ranked ) Top 0 among ISIC Industries Share in Macro CapEx CAGR* 00-0 CAGR* 00-0 World Ranking in Other Regions/Countries (Strongest is Ranked ) U.S. Western Europe OECD Asia excl. Japan China India. Refined Petroleum & Related Energy Mining Health Care Services.... Education Computing & Related Services.0... Public Admin. and Defense Food, Beverages & Tobacco Engines and Turbines Pharma: Drugs and Medicines Agricultural Machinery * CAGR: Compound Annual Rate Copyright 00 IHS Global Insight. All Rights Reserved. 0

11 GDP is Shaped By Trade Patterns Exports Are Typically More Volatile than Overall GDP (Percent Rates) in Exports and GDP, Japan in Exports and GDP, ROW 0% % % 0% 0% % Annual % 0% -% Annual 0% % 0% -0% -% -% -0% -0% % Real GDP Real Exports Nominal Exports (DomesticCurrency) Real GDP Real Exports Nominal Exports ($) Copyright 00 IHS Global Insight. All Rights Reserved.

12 Which Industries Show the Fastest Nominal Export? (Industry Ranking of Rates in Nominal Domestic Currency) Top Export Industries Among Merchandise Industries Ranked by Forecast Rate in Exports (Nominal Domestic Currency, CAGR 00 0) Ranking in Japan (Strongest is Ranked ) Top 0 among Merchandise Industries Share in Goods Exports CAGR* 00-0 CAGR* 00-0 World Ranking in Other Regions/Countries (Strongest is Ranked ) U.S. Western Europe OECD Asia excl. Japan China India. Pharma: Drugs and Medicines Basic Industrial Chemicals.0... Railroads and Equipment Agricultural Machinery Special Industrial Machinery Mining & Construction Machinery General Industry Machinery Lifting and Handling Equipment Domestic Appliances Furniture, Jewelry, Toys, Musical... * CAGR: Compound Annual Rate Copyright 00 IHS Global Insight. All Rights Reserved.

13 Trade Prospects for Japanese Industries Industries Where Japan is a large Exporting Region in Global Trade Size of Exports by Sector, Japan (Based on Exports in 00) Large Medium Small Global Consumption, Real (00-0) Fast Medium Slow Computers and Office Machinery Basic Metals Electrical Industrial Machinery Semiconductors, CBs, and LCDs Receivers, Players, Sound Systems Synthetic Resins and Fibers Medical and Measuring Equipment Engines and Turbines Motor Vehicles, Trailers & Parts Fabricated and Structural Metal Specialty Chemicals (ex. Pharma) Furniture, Jewelry, Toys, Musical Other Special Indust. Machinery Textiles and Apparel Mining of Metals and Stone Refined Petroleum & Related Basic Industrial Chemicals Optical & Photographic Equipment Rubber and Plastic Products Other General Industry Machinery Fertilizers and Ag Chemicals Machine Tools Printing and Related Services Mining & Construction Machinery Lifting and Handling Equipment Metallurgy Machinery and Casting Shipbuilding Energy Mining Agriculture Aircraft and Spacecraft Motorcycles, Bicycles, Other Transport. Watches and Clocks Railroads and Equipment Food, Beverages & Tobacco Pharma: Drugs and Medicines Domestic Appliances Glass and Products Mineral Products (excl. Glass) Paper and Pulp Wood Products (ex. Furniture) Publishing Agricultural Machinery Copyright 00 IHS Global Insight. All Rights Reserved.

14 Import Prospects for Japanese Industries Industries Where Japan is a large Importing Region in Global Trade Size of Imports by Sector, Japan (Based on Imports in 00) Large Medium Small Sector Consumption, Japan, Real (00-0) Fast Medium Slow Energy Mining Food, Beverages & Tobacco Basic Metals Agriculture Refined Petroleum & Related Semiconductors, CBs, and LCDs Fabricated and Structural Metal Textiles and Apparel Computers and Office Machinery Motor Vehicles, Trailers & Parts Mining of Metals and Stone Electrical Industrial Machinery Medical and Measuring Equipment Receivers, Players, Sound Systems Aircraft and Spacecraft Optical & Photographic Equipment Domestic Appliances Specialty Chemicals (ex. Pharma) Printing and Related Services Engines and Turbines Pharma: Drugs and Medicines Rubber and Plastic Products Mineral Products (excl. Glass) Basic Industrial Chemicals Furniture, Jewelry, Toys, Musical Synthetic Resins and Fibers Other Special Indust. Machinery Other General Industry Machinery Paper and Pulp Wood Products (ex. Furniture) Machine Tools Publishing Motorcycles, Bicycles, Other Transport. Agricultural Machinery Fertilizers and Ag Chemicals Mining & Construction Machinery Lifting and Handling Equipment Watches and Clocks Glass and Products Metallurgy Machinery and Casting Shipbuilding Railroads and Equipment Copyright 00 IHS Global Insight. All Rights Reserved.

15 Introducing a Barometer to Measure Which Industries Are Best Positioned For Recovery (BPFR) Forecast Factors Comprising the Barometer of Best Positioned For Recovery Among Industries. Capital Efficiency factors show which industries maintain CapEx to be well-positioned for the eventual cyclical recovery; which industries generate funding from internal cash flows; and which achieve a healthy return on investments while keeping capacity in line with underlying demand in CapEx and Free Cash Flow During Recession High Return on Invested Capital Low Risk of Capacity Overhang. Forecast and Profits factors show which industries are expected to maintain pricing power and expend profit margins in the recovery period, in addition to enjoying fast growth of sales volumes Forecast in Real Sales, Nominal Profits Forecast Pricing Strength Forecast Change in Profit Margins Copyright 00 IHS Global Insight. All Rights Reserved.

16 Which Industries Are Best Positioned for Cyclical Recovery in Japan? Top BPFR Performers in Japan BPFR Ranking (Strongest is Ranked, ranked over ISIC Industries) Ranking in BPFR Categories (Strongest is Ranked ) & Profits Capital Efficiency. Education. Machine Tools. Agriculture. Wholesale Trade. Land Based Transportation. Telecommunications. Utilities. Mineral-based Products (excl. Glass). Manufacture of Basic Metals 0. Food and Beverages 0 0 Copyright 00 IHS Global Insight. All Rights Reserved.

17 Which Industries Are Worst Positioned for Cyclical Recovery in Japan? Bottom BPFR Performers in Japan BPFR Ranking (Weakest is Ranked, ranked over ISIC Industries) Ranking in BPFR Categories (Strongest is Ranked ) & Profits Capital Efficiency. Textiles and Apparel. Glass and Glass Products. Receivers, Players, Sound Systems. Furniture, Jewelry, Toys, Musical. Research and Development. Retail Trade. Computers and Office Machinery. Transmitter and Routers. Wood Products (excl. Furniture) 0. Energy Mining Copyright 00 IHS Global Insight. All Rights Reserved.

18 IHS Global Insight Forecasts Advise Investment Strategy Asset Class Allocation: Stocks Stocks V. V. Bonds Bonds V. V. Others Others Domestic Domestic V. V. Foreign Foreign Country Choice: Stocks Stocks Bonds Bonds Exchange Exchange Rates Rates Portfolio Portfolio Allocation Allocation to to Assets Assets Classes: Classes: Stocks, Stocks, Bonds, Bonds, Foreign Foreign Exchange, Exchange, Commodities, Commodities, Real Real Estate Estate Domestic Domestic V. V. Foreign Foreign Developed Developed Versus Versus Emerging Emerging Markets Markets Country Country Choice Choice within within Developed Developed Markets Markets (U.S., (U.S., EMU, EMU, Japan, Japan, Canada, Canada, etc) etc) Country Country Choice Choice within within Emerging Emerging Markets Markets (China, (China, Brazil, Brazil, Russia, Russia, etc) etc) Foreign Foreign Exchange Exchange Overlay Overlay Sector Rotation Strategy: Stock Stock Sectors Sectors Stock Stock Sector Sector Rotation Rotation Strategies Strategies for for Sector Sector Weighting Weighting Within Within Countries Countries GICS GICS System System for for Sectors Sectors and and Industries Industries Copyright 00 IHS Global Insight. All Rights Reserved.

19 Country And Sector Investment Rotation Framework For Equities Uses Fundamental, Market and Technical Factors A Fundamental, Quantitative Basis for Equity Portfolio Construction with an Overlay for Technical Conditions and Migration in Credit Quality* Fundamental and Market Factors include Dividend Yield, Dividend Payout Ratio, P/E Ratio Forecasts Factors from IHS Global Insight include Sales, Profits, Free Cash Flow, Interest Rates, Yield Curve, Exchange Rates Technical Indicator/Momentum of Stock Price show the extent to which stock prices are moving up or down relative to their one-year history Country and Sector Rotation Strategies for Equities Apply to Portfolios Constrained by: Stocks only (no Bonds or Cash) Long Only (no shorting of sectors) Diversified exposure avoid an over-concentration of individual countries or sectors Risk Indicator from IHS Global Insight shows the direction of migration in credit quality and operating risks *. James P. O'Shaughnessy, What Works On Wall Street, nd ed. (Columbus, OH:McGraw-Hill, ) *. Bollinger, J. 00, Combining Technical and Fundamental Analysis, CFA Equity Topics: Highlights from the 00 CFA Institute Annual Conference Copyright 00 IHS Global Insight. All Rights Reserved.

20 Country Rotation Strategy for Stock Markets: View from Japan Fundamental Equity Valuation Metrics, January 00 Investment Metrics: P/E Dividend Yield Real GDP in Nominal Profits End-Year 00 H* End-Year 00 H* -Year Ahead (00-00) Turning Point -Year Ahead (00-00) Turning Point Momentum Indicator Year Ahead Expected Total Return, LC Year Ahead ETR, US$ Year Ahead ETR, Yen Japan % 0.%.% U.S %.% 0.% EMU Copyright 00 IHS Global Insight. All Rights Reserved % -0.%.% Emerging Markets % -.% -.% () H* - End 00 value divided by the average of the previous years () Turning Point - -year forward growth divided by the year historical average () Momentum Indicator January 0, 00 prices in local currency divided by the average of the previous months The dividend yield on Japan s stocks are historically attractive, but less than is available in foreign markets The EMU and emerging market composites are less expensive (lower P/E) than Japan Japanese growth and profits will decline in 00-00, but maybe less than in Europe Expected returns in yen from U.S. and emerging markets are boosted by forecasts for exchange rates, but returns from EMU are eroded by FX

21 Role of Emerging Markets in Foreign Equity Portfolio: Short Term Volatility Versus Long Term Value Correlation, % Total Return 0 0. Risk Versus Return in Equity Markets UNITED KINGDOM USA.. ITALY FRANCE. JAPAN. EMERGING MARKETS RISK (ST. DEV). GERMANY Correlation in Equity Market Returns ( 00) US & EMU US & JAPAN US & EM EMU & EM. EM = Emerging Markets Composite EMU = European Monetary Union Composite. EMU & JAPAN. JAPAN & EM Stock Markets are Weak in the Short Term Cash is King! Markets Typically Overshoot Fair Value On the Way Up and On the Way Down Patience is Required but Prepare to Take Advantage of Eventual Cyclical Recovery Emerging Markets Offer an Attractive Risk- Return Relationship, and Significant Diversification Benefits, Over a Medium and Long Term Investment Horizon Returns in Up- & Down-Markets ( 00) Copyright 00 IHS Global Insight. All Rights Reserved. Average Return, % Up Markets US EMU Japan Emerging Markets Down Markets

22 Sector Rotation Strategy for Japan s Stock Markets Energy Recommendations for Sector Rotation: Over, Equal or Under-Weight Positions for 0 Broad Stock Market Sectors in Japan, January 00 Jan Market Share. Price H* 0. End- Year 00. P/E H* 0. Dividend Yield Sector Recommendation End- Year 00. H*. Real Sales, -Year Ahead -. Nominal Profits, -Year Ahead -. Financial Leverage (Asset % Equity) Short Term Debt % Total Debt Underweight Materials Underweight Industrials Consumer Discretionary Consumer Staples Overweight Health Care Overweight Financials Underweight Information Technology Telecoms Utilities Sector Total Copyright 00 IHS Global Insight. All Rights Reserved Price H* -- January 00 price index in local currency divided by the average of the previous months H* -- End 00 value divided by the average of the previous years ** -- Market Totals for Financial Leverage, and for Short Term Debt as% of Total, are Excluding Financials ** ** Underweight

23 Sector Rotation Strategies for 00 Over-, Equal- or Under-Weight Sector Positions Within Country Markets Recommendation for Sector Rotation Strategies Within Country Stock Markets January 00 JAPAN U.S. CANADA EMU UK Energy Small Under Weight Small Under Weight Materials Industrials Small Over Weight Small Under Weight Consumer Discretionary Small Under Weight Consumer Staples Health Care Financials Information Technology Small Over Weight Telecomm. Services Small Under Weight Small Over Weight Utilities Small Under Weight Small Over Weight Note: These strategies are developed according to local currency returns from the specified markets Copyright 00 IHS Global Insight. All Rights Reserved.

24 Thank you Mark Killion, CFA Group Managing Director World Industry Service