Investment Outlook 2001

1
Investment Outlook 2001
Daniel Chan Managing Director Chief Investment
Officer UOB Asset Management Ltd.
2
Investment Outlook 2001
Contents - What Happened in 2000 - The Issues in
2001 - Base Case Investment Scenario - Outlook
Strategy - Global Bonds - US
Equities - European Equities - Japan
Equities - Asia ex-Japan - Singapore
- Conclusions
3
What Happened in 2000
1. Correction in the technology / telecom sector.
2. Tightening of US monetary
policy. 3. Slowdown in US economy. 4. Sharp
revision of corporate earnings. 5. The Euro
tanked. 6. Spike in oil prices. 7. Asia
equities did especially poorly.
4
NASDAQ Ruled...
Optical coys revise up earnings guidance after
strong Q4 00 results
Tech stocks correct on fears that telcos cut back
in CAPEX will hurt tel eqpt food chain
Intel pre-announces lower than expected results
for Sep quarter
German UMTS licence auction ends - investors fear
telcos overpaid
Liquidity in high yield financing evaporates
causing bankruptcies amongst US emerging telcos
US mutual funds tax loss selling pressure takes
effect
Semiconductor and telecom eqpt coys report robust
bookings
Apple reduced Q1 01 earnings guidance
Nokia lowers Q3 margin expectations - investors
fear slowdown in cellular handset demand
Baron's publishes article on excessive vendor
financing - fears of CLEC default on loan
repayment resurface
SSBs Jonathan Joseph calls an earlier end to
semiconductor growth cycle
UK UMTS licence auction ends - investors fear
telcos overpaid
Nortel reports inventory build up at US telcos
Cisco reports build up in inventory
Apple reduced Q1 01 earnings guidance
Source UOBAM
5
Fed Rate Hikes
16 May - 50 bp hike
21 Mar - 25 bp hike
2 Feb 25 bp hike
2000
1999
Source Bloomberg
6
Fed Rate Hikes Earnings Growth
7
Fed Rate Hikes Earnings Growth
Source Soc-Gen
8
Oil Price Rose
Source Bloomberg
9
Asia Equities Did Poorly
Investments were flowing out of Asia dedicated
funds.
Portfolio equity flows into Asia
Source Goldman Sachs
10
What Happened in 2000
How the stock markets performed last year

11
MSCI Far East Free Ex-Japan
Source Bloomberg
12
Investment Opportunities in 2001
Down markets create opportunities...
Source MSDW
13
The Issues in 2001
- Will there be a hard landing ? - Have the TMT
sectors bottomed ?
14
The Issues in 2001
Will there be a hard landing ?

• The case for
• Negative wealth effect
• Investment boom (especially IT) over
• Consumer is tapped out
• Corporate debt build-up

15
The Issues in 2001
Will there be a hard landing ?

• The case against
• Room for interest rate cuts
• IT and other technological investment still
  needed in a fiercely competitive environment
• Other policy options available (tax cuts, fiscal
  stimulus, US dollar weakens)
• US economy remains highly competitive

16
The Issues in 2001
For a HARD LANDING scenario to happen, these must
happen
- Core inflation rises rapidly, preventing a
relaxation of monetary policy, - Wage rise
(labor costs) outstripping productivity
growth, - Oil prices skyrocketing out of
control, - Extreme risk aversion spreading to
investment grade credits, - Occurrence of an
unexpected and contagious event risk that
results in confidence flight. Our conclusion is
that the odds of this happening is smaller than
that of a SOFT LANDING.
17
The Issues in 2001
The Fed and the other central banks have room to
cut interest rates...
18
The Issues in 2001
Have the TMT sectors bottomed ?
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Have the TMT Sectors Bottomed ?
Nasdaq Price Chart (1975 2000, logarithmic
scale)
Between 1980 and 1990 Index up 84.8 Between
1990 and 2000 Index up 560.8 PE of NASDAQ
Composite 101.8x
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Have the TMT Sectors Bottomed ?
Nasdaq Price Chart (1975 2000)
Between 1980 and 1990 Index up 84.8 Between
1990 and 2000 Index up 560.8 PE of NASDAQ
Composite 101.8x
21
Have the TMT Sectors Bottomed ?

• US technology sector is attractive relative to
  the broad market

US Tech sector PEG (Fwd EPS) against US broad
market
US Tech PEG 1.22x vs SP 500 PEG 1.50x
Source MSDW (Jan 01)
22
Have the TMT Sectors Bottomed ?
The NASDAQ 100 - Now closer to fair value
Source Datastream
23
Have the TMT Sectors Bottomed ?
The tech bubble in perspective..
Source The BCA
24
Have the TMT Sectors Bottomed ?
Valuation Statistics for Top 20 companies of
NASDAQ 100
25
Have the TMT Sectors Bottomed ?
Valuation Statistics for Top 20 companies of
NASDAQ 100
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TMT Valuations - US
US 2001 Price/ Expected EPS Implied
EPS Companies PER Book growth (00-05) growth
(00-05) Worldcom 15.8 1.0 13.4 7.5 Nortel 33
.7 4.4 25.9 20.5 Corning 35.2 5.6 27.4 22.2
JDS Uniphase 37.1 1.7 47.4 24.5 Sun
Microsystems 32.1 10.9 23.0 16.0 EMC 62.7 1
8.8 30.1 26.0 Microsoft 24.1 5.8 19.7 23.0
AOL Time Warner 73.0 11.0 25.0 21.0 Intel
21.1 5.7 19.5 8.0 PMC Sierra 42.0 14.6 44.0
17.0 Broadcom 61.0 8.9 46.0 32.0 Applied
Materials 13.0 5.6 24.0 1.0 Broadvision 40.2
2.6 50.9 24.0 Yahoo 49.7 8.3 44.2 28.2
Prices as of 5 Jan 01
27
TMT Valuations - Europe
Europe 2001 Price/ Expected EPS Implied
EPS Companies PER Book growth (00-05) growth
(00-05) Nokia 43.7 29.3 25.0 22.5 Alcatel 3
1.8 5.2 31.4 15.2 Autonomy 79.0 28.0 50.0 35
.3 Vodafone 44.4 1.1 30.0 24.8 Deutsche
Telekom 43.1 3.0 10.0 16.7 France
Telecom 37.9 5.0 16.5 8.1
Prices as of 5 Jan 01
28
TMT Valuations - Japan
Japan 2001 Price/ Expected EPS Implied
EPS Companies PER Book growth (00-05) growth
(00-05) Murata 24.5 5.9 23.0 12.0 Tokyo
Electron 19.3 4.7 18.3 10.0 NTT
DoCoMo 47.5 10.8 18.0 9.0 Fujitsu 164.5 2.7
18.0 19.0 Trend Micro 87.3 29.1 26.0 19.0 S
ony 52.4 3.6 16.0 12.5 Net One
Systems 75.2 19.6 23.0 15.5 Nippon System
Development 59.9 9.7 26.0 21.5
Prices as of 5 Jan 01
29
TMT Valuations - Asia ex-Japan
Asia 2001 Price/ Expected EPS Implied
EPS Companies PER Book growth (00-05) growth
(00-05) China Mobile 27.0 10.4 26.0 18.0 PCCW
25.0 3.9 11.0 22.0 Korea Telecom 20.0 1.6 14
.0 11.0 SK Telecom 21.0 6.4 25.0 15.0 Taiwa
n Cellular Corp 9.0 5.8 17.0 -6.0 Infosys 42.
0 50.7 52.0 50.0 Gul Technologies 10.0 2.2 22.
0 -10.0 Venture Manufacturing 22.0 7.4 22.0 1
1.0 TSMC 13.0 7.4 23.0 5.0 HK
TVB 22.6 7.8 18.9 15.5
Prices as of 5 Jan 01
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Base Case Investment Scenario

• 1. A soft landing for the global economy - with
  the slowdown led by the US.
• 2. Inflation to remain subdued.
• 3. Interest rates to fall in 2001.
• 4. Oil prices to stabilize at current levels.

31
Bond Market Outlook
Expect lower rates ...
32
Credit spreads are attractive...
Bond Market Outlook
33
What the Fed Funds Futures are forecasting?
Bond Market Outlook

• US Fed Funds futures are already forecasting
  almost 1 cut in Fed Funds rate by end Aug 2001

34
Rates anticipation
Bond Market Outlook

• Bond yields have already priced in a soft landing
• Unless there is a hard landing, further yield
  decline would be a overreaction
• Therefore yields are likely to stay close to
  current levels unless the economic scenario
  worsens
• However, reality tells us there will always be
  overreaction

35
EMBI Spread IndexThe emerging sovereign spread
has widened despite improving fundamentals .
Bond Market Outlook
36
US Real Yields - Little room to fall
Bond Market Outlook
Source Bloomberg
37
Bond Market Strategy

• Bond yields do not have much room to fall
• Slightly below benchmark duration
• Opportunities in good quality investment credits
• Emerging sovereign credits to outperform high
  yield corporate bonds

38
Equity Market Strategy
1. At current levels, equities have adequately
discounted the risks, and are well underpinned
by more reasonable valuations. 2. Stay invested
and stay diversified - equities are attractive
in a soft landing scenario. 3. Equity market
strategy
US Underweight Europe Neutral Japan Neu
tral Asia ex-Japan Overweight
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Equity Market Strategy
4. Sector Strategy - Financials and interest
rate sensitive sectors should benefit from
lower rates. - Healthcare - the consistent
growers, resilient to earnings disappointment.
- Technology Telecom - selective in
telecom and tech fallen angels.
40
US Equities - Underweight
Economic growth is slowing to a more moderate
pace - we are looking for a soft landing for the
US economy
US companies profit growth will also slow
41
US Equities - Underweight

Fourth quarter companies earnings will be weak,
partly hurt by weaker consumer spending
And expectations of lower capital spending
42
US Equities - Underweight
PER and PEG of US Stocks (SP 500)
43
US Equities - Underweight
Source SocGen
44
US Equities - Underweight
Source SocGen
45
US Equities - Underweight
Mutual fund cash levels have risen back to its
mean.
46
US Equities - Underweight
No excess capacity outside technology
Source The BCA
47
European Equities - Neutral

• Warning signs of a slowdown in the economy

48
European Equities - Neutral

• But there is also more leeway for expansionary
  fiscal policy

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European Equities - Neutral

• More room for looser monetary policy, and

50
European Equities - Neutral
Stock valuations are not demanding
51
Japan Equities - Neutral
Economic growth momentum slowing . as indicated
by industrial production (leading indicator of
GDP) slowing down.
52
Japan Equities - Neutral
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Japan Equities - Neutral
Strategic Restructuring More MAs and asset
disposal instead of layoffs. But at the
corporate level, restructuring continues, which
is positive for the market.
Source HSBC
54
Japan Equities - Neutral
Foreigners have been the ones that drove the
market. This chart suggests that the market is
bottoming.
Source HSBC
55
Japan Equities - Neutral
Valuations provide support
PER levels calculated using one-year rolling
forward IBES EPS forecasts
Going back to valuations, mkt looks cheap Over
past 12 years, floor 35X 1450 on TOPIX PER
lowest 31X in Oct98 1300
56
Japan Equities - Neutral
Japan has huge catch-up potential
Source The BCA
57
Asia ex-Japan - Overweight
The investment case for Asia ex-Japan

• Favorable liquidity conditions
• Healthy current account balance
• Mild inflation
• Low interest rates
• Increasing trend of MA and privatization
• Prime beneficiary of outsourcing trend
• Chinas WTO accession in 2001
• Compelling valuations

58
Asia ex-Japan - Overweight

Healthy current account balance
US
EMU11
Japan
Non-Japan Asia
of GDP
Source Goldman Sachs
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Asia ex-Japan - Overweight
Inflation under control
Yr
Yr
Source HSBC Securities
60

Asia ex-Japan - Overweight
Scope for lower interest rates
EOP, 3M
EOP, 3M
Source HSBC Securities
61
Asia ex-Japan - Overweight

Asia-5 Loan-to-deposit ratio - Still very low
Source The BCA China Analyst
62

Asia ex-Japan - Overweight
Restructuring and MA continue apace

• Increasing trend of MA activity across Asia.
  Expect more MA transactions to follow,
  particularly in the telecom and financial
  services sectors.
• Privatization within Asia are helping to drive
  restructuring.

Source Goldman Sachs
63

Asia ex-Japan - Overweight
Prime Beneficiary of Outsourcing Trend

• Slowing US investment may trigger defensive
  strategies by OEMs - by increasing outsourcing,
  which benefits Asian Electronic Contract
  Manufacturers.

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Asia ex-Japan - Overweight
WTO Boosts FDI Inflows

• Chinas accession into WTO offers substantial
  opportunities for corporate leaders which will
  lead the consolidation or deregulation of major
  industries.

Source Soc-Gen
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Asia ex-Japan - Overweight

There has been a dramatic shift in market shares
among Asian competitors for US imports
Source The BCA China Analyst
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Asia ex-Japan Compelling Valuations

• Asian markets have priced in significant
  earnings slowdown.
• Valuations are back to crisis levels although
  fundamentals remain intact.

Note The above numbers are based on Datastream
index levels for the respective markets as at 19
Dec 2000 Source CSFB
67
Asia ex-Japan Compelling Valuations
Source MSDW, ABN Amro
68
Asia ex-Japan - Overweight

Investment Strategy

• Overweight Singapore, China Hong Kong,
  Korea
• Neutral Taiwan
• Underweight Thailand, Indonesia,
  Philippines Malaysia

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Asia ex-Japan - Overweight
Asia ex-Japan Stock Picks
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Singapore Equities - Overweight
Review

• Singapore outperformed the region in the last
  quarter of 2000.
• Sector performance (relative to STI)
• Outperformed Underperformed
• Properties 5.6
• Transportation 5.5
• Electronics 6.1
• Financials 0.7

Source Bloomberg
71

Singapore Equities - Overweight

• We are overweight Singapore in our Asia-Ex-Japan
  portfolio.

• Investment Rationale
• Safe-haven status.
• High earnings stability (14 earnings growth in
  2001 following a high 29 in 2000), low
  gearing, and still improving ROEs.
• Good corporate governance.
• Significant restructuring expected in the
  banking and conglomerate sectors - this will
  drive margin expansion and greater capital
  efficiency.
• Domestic liquidity is good with interest rates
  low, the banking sector's loan-to-deposit ratio
  low and the potential for US rates to fall
  further.

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Singapore Equities - Overweight

• Investment Rationale
• Equity earnings yield are more attractive than
  rate of return on alternative investments.
• Valuations are attractive at current and forward
  PE multiples of 16x and 14x respectively, with
  positive earnings yield gap.

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Singapore Equities - Overweight

• Investment Risks
• Political uncertainties in surrounding
  countries.
• A significant slowdown in electronics exports to
  the US.
• Little room for S interest rates to fall as
  they are already quite low .

Source CLSA
74
Singapore Equities - Overweight

Sector and Stock Picks Sector O/U/N Stocks Rema
rks Banking O/W UOB, OCBC Divestment of non-core
assets over next 1-2 years hold key to
releasing liquidity back into banking
system. As local banks focus on search for
strategic partnerships or new markets, any
positive news is expected to drive up share
prices. Conglomerates O/W SCI One of the main
proponents of corporate restructuring as
management strives to improve capital
management and focus on delivering
shareholder value.
75
Singapore Equities - Overweight

Sector and Stock Picks Sector O/U/N Stocks Rema
rks Property - residential U/W Private
residential housing demand remains anemic.
Prices expected City Dev to fall 10-15
this year. - commercial N Capitaland Demand
supply mismatch in office properties
expected to lead to tight rental market
until 2002. Technology N Elec Eltek Pockets
of strength in industry Venture which is
facing lower demand in all its major
segments. Prefer companies with strong
business proposition (low cost, high
quality).
76
Singapore Equities - Overweight

Sector and Stock Picks Sector O/U/N Stocks Rema
rks Transportation O/W SMRT, Earnings stream
underpinned by Delgro low base demand for
public transportation as well as lower oil
prices this year.
77
Strategy Outlook
SECTOR STRATEGY
78
Financial Services
The long run outlook for the financial sector
remains positive. However, near term upside
potential in the financial stocks is capped by
asset quality concerns.
Financials Performance vs. Interest Rate Cycle
(1995-2000)
79
Financial Services
Asset Quality Concerns
We recognized that NPAs are creeping up and do
not rule out the possibility of a credit cycle.
However the situation is in a better condition
as compared to the 1991 recession. The strong
earnings of the banks over the last few years
will enable them to be resilient to the increase
in NPAs.
80
Healthcare
Defensive sector and stable earnings growth
US pharmaceutical companies earnings hold steady
while SP 500 earnings are coming off.
We are here
Source SalomonSmithBarney
81
Healthcare
Healthcare stocks outperform when its growth rate
surpasses the market.
We are here
Source SalomonSmithBarney Note Bars represent
the difference in growth rate between the
pharmaceutical sector and the SP 500
82
Healthcare

• Still Positive on Healthcare
• Secular outlook also intact,
• driven by the aging global population,
• rising health care spending and
• technological advances.

83
Technology/Telecom

• Lower earnings visibility in general for 2001
• Downgrades should continue into H1 01
• Demand / supply imbalance biased against demand
• Telecoms sector over-geared
• Credit problems may worsen for telecoms
• Pricing pressures hurt fixed line operators
• Mobile operators face increasing competition
• Tech sector growth intact albeit slower pace
• Further CAPEX cuts expected
• Increased vendor financing raises concerns over
  credit quality

84
Technology/Telecom

• Valuations begin to look attractive

US Tech sector PEG (Fwd EPS) against 10yr mean
US Telecoms sector PEG (Fwd EPS) against 10yr mean
Current PEG 1.22x vs 10yr mean 1.23x
Current PEG 1.74x vs 10yr mean 1.62x
Source MSDW (Jan 01)
Source MSDW (Jan 01)
85
Technology/Telecom

• Long term growth trends still intact
• IT spending will remain an important driver of
  productivity
• Broadband growth will accelerate
• Alternate internet access devices becoming more
  widespread
• Outsourcing trend will pick up

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Investment Outlook - Conclusions I

• Base case scenario - soft landing of US economy
  but risk of recession not insignificant.
• TMT sector bottoming out but some areas still
  vulnerable. On the other hand, certain stocks
  looking very attractive.
• US dollar has likely peaked against the Euro.
• Japanese recovery stalling and risk of recession
  increased.

87
Investment Outlook - Conclusions II

• The economic outlook is cloudy but unlikely to
  be disastrous.
• Forecasting economic conditions is difficult
  enough. Even more difficult is predicting
  how markets will behave.
• Therefore, focus on long term investing and
  stock selection.
• Fundamentals and valuation do matter.

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Investment Outlook 2001
OUR CONCLUSION - A BETTER 2001.