STRATEGY NOMURA INTERNATIONAL (HK) LIMITED The long run, the short run and the in-between Asia and the rebalancing of the world financial system: inventory restocking, an inflation echo and growth in bi- lateral emerging market trade Sean Darby Tel: +852 2252 2182 email: [email protected] January 2010 Any authors named on this report are strategists unless otherwise indicated. See the important disclosures and analyst certifications on pages 76 to 79. ASIA An unbalanced world Budget deficits C E Cyclical budget Europe o x Asia deficits n Trade p s o + Aging population u r Aging population m t Korea, Taiwan p EM t Under-funding i Baby boomers pension schemes o Vietnam, Indonesia US n and India Impaired banking High saving rate systems Overvalued Unimpaired exchange rates banking system Oil dependent Japan Oil dependent Declining saving Under valuated rate exchange rates © Nomura International (Hong Kong) Limited 2 Source: Nomura International (Hong Kong) Limited – Investment Strategy ASIA Asia: From deflation to inflation Goldilocks Undervalued Steep yield curve Exchange rate Asia Deflation G7 + Low nominal Carry Growth interest rates trade EM Current account Weak US dollar surplus Low bond long term bond yield Source: Nomura International (Hong Kong) limited – Investment Strategy © Nomura International (Hong Kong) Limited 3 ASIA Global liquidity and US interest rates © Nomura International (Hong Kong) Limited 4 ASIA Excess liquidity and US treasury holdings Excess liquidity in Asia Total major foreign holdings of US treasuries % y-o-y, % points Excess liquidity, % points (US$bn) 30 Broad money supply, % y-o-y growth 3500 25 Nominal GDP, % y-o-y growth 20 3000 15 2500 10 2000 5 0 1500 -5 1000 -10 500 -15 China Mal India Thai Sing Twn Phil Kor HK Viet Indo Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Note: The latest data available are mostly for 2Q09 except: for nominal GDP India and Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Korea are 1Q09; for broad money supply Indonesia is April-May and Vietnam is 4Q08. Source: TIP, Nomura International (Hong Kong) Limited – Investment Strategy Source: Bloomberg, CEIC, Thomson Reuters Datastream, Nomura International (Hong Kong) Limited – investment Strategy © Nomura International (Hong Kong) Limited 5 ASIA Asia rebalancing: watch current accounts Current account balance in Asia ex- Per capita GDP in low- to middle- Japan income economies in Asia Per capita GDP Population (% GDP)Current account (RHS) (US$bn) Average annual 8 Current account as % of GDP (LHS) 800 2003 2008 rate of growth 2008 from 2003 to 2008 7 700 F USD USD % million 6 600 Low to middle incom e group 997 2,285 18.0 2,978 5 500 China 1,269 3,258 20.7 1,328 India 535 1,052 14.5 1,154 4 400 Indonesia 1,100 2,247 15.4 229 Philippines 973 1,845 13.7 90 3 300 Vietnam 489 1,051 16.6 86 2 200 Thailand 2,261 4,299 13.7 63 Malaysia 4,400 8,008 12.7 28 1 100 High income group 17,071 25,967 8.8 105 0 0 South Korea 13,451 19,111 7.3 49 Taiwan 13,546 17,060 4.7 23 (1) (100) Australia 26,371 46,651 12.1 22 (2) (200) Hong Kong 23,559 30,863 5.5 7 Singapore 22,651 37,597 10.7 5 90 92 94 96 98 00 02 04 06 08 10 Note: Asia ex-Japan includes China, India, Taiwan, Korea and ASEAN6. Source: CEIC, Nomura Global Economics. Source: Nomura Global Economics , CEIC, IMF © Nomura International (Hong Kong) Limited 6 ASIA S&L crisis in 1990s … US$/JPY vs US yield curve spread US yield curve ratio vs KCLI index 4.50 % 900 % Per 10,000 JPY Yield curve ratio (10 minus 2 year) 4.50 130 4.00 KLCI index (local currency) RHS 800 120 700 4.00 3.50 110 3.50 600 US$/JPY (RHS) 3.00 100 3.00 500 90 2.50 2.50 400 80 2.00 300 2.00 70 1.50 200 1.50 60 1.00 100 1.00 50 US yield curve spread (LHS) 40 0.50 0 0.50 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: Thomson Reuters Datastream; Nomura International (Hong Kong) Limited – Investment Strategy © Nomura International (Hong Kong) Limited 7 ASIA … leads to familiar problems US yield curve ratio vs Hang Seng US yield curve ratio vs Brazil index Bovespa % 000'S % 000'S 4.50 30 4.50 80 US yield curve ratio (LHS) Brazil Bovespa (RHS) 4.00 US yield curve ratio (LHS) 4.00 70 25 Hang Seng index (RHS) 3.50 3.50 60 20 3.00 3.00 50 2.50 15 2.50 40 2.00 2.00 30 10 1.50 1.50 20 5 1.00 1.00 10 0.50 0 0.50 0 84 86 88 90 92 94 96 98 00 02 04 06 08 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: Thomson Reuters Datastream; Nomura International (Hong Kong) Limited – Investment Strategy © Nomura International (Hong Kong) Limited 8 Source: Bloomber © Limited Kong) (Hong International Nomura Get readyforan inflationecho ASIA 150 200 250 300 350 400 450 500 550 600 (%y-y) (US Cent/kg) (200) (100) 100 200 300 400 500 600 bp1 Best) Tea prices(Mombasa, Kenyaaggregate, Baltic DryIndex(%y-y) - De c-01 Dec-90 Jun-02 Dec-91 g ; Nomura International Dec-02 Dec-92 Dec-93 Jun-03 Dec-94 Dec-03 Dec-95 Jun-04 Dec-96 Dec-04 Dec-97 ( Hon Dec-98 Jun-05 g Kon Dec-99 Dec-05 Dec-00 g) Limited Jun-06 Dec-01 Dec-06 Dec-02 – Jun-07 Dec-03 Investment Strate Dec-04 Dec-07 Dec-05 Jun-08 Dec-06 Dec-08 Dec-07 gy Jun-09 Dec-08 Dec-09 Dec-09 (60) (40) (20) (%y-y) 20 40 60 DRAM PriceIndex CRB index(%y-y) 2,000 2,500 3,000 3,500 4,000 4,500 5,000 (index) 0 Dec-91 Dec-05 Dec-92 Mar-06 Dec-93 Jun-06 Dec-94 Sep-06 Dec-95 Dec-06 Dec-96 Mar-07 Dec-97 Dec-98 Jun-07 Dec-99 Sep-07 Dec-00 Dec-07 Dec-01 Mar-08 Dec-02 Jun-08 Dec-03 Sep-08 Dec-04 Dec-08 Dec-05 Mar-09 Dec-06 Jun-09 Dec-07 Sep-09 Dec-08 Dec-09 Dec-09 9 Source: CEIC;Nomura International (H Commodities: we prefersofts,coalandsteel ASIA © Limited Kong) (Hong International Nomura 1000 1200 (RMB/Ton) (days) 200 400 600 800 100 120 140 160 180 Source: USDA, Nomura 40 60 80 China average cokingcoalprice World corninventorycoverage (days) 0 Nov-01 1960 May-02 Nov-02 1967 May-03 Nov-03 May-04 1974 ong Kong) Limited – Investment Strategy Nov-04 May-05 1981 Nov-05 May-06 1988 Nov-06 Ma y-07 Nov-07 1995 May-08 Nov-08 2002 May-09 Nov-09 2009 Source: Bloomberg; Nomura International Source: Bloomberg; Nomura International 10,000 15,000 20,000 25,000 30,000 35,000 40,000 5,000 FTSE APGold index Hang SengUtilities indexrelativeto Grade B Rice prices:ThailandWhite 100% 500 520 540 560 580 600 620 640 660 US D/MT Dec-04 Dec-08 Mar-05 Jan-09 Jun-05 Sep-05 Feb-09 Dec-05 Mar-09 Mar-06 Jun-06 Apr-09 Sep-06 Dec-06 May-09 (Hong Kong) Limited – Investment Strategy (Hong Kong) Limited – Investment Strategy Mar-07 Jun-09 Jun-07 Sep-07 Jul-09 Dec-07 Aug-09 Mar-08 Jun-08 Sep-09 Sep-08 Dec-08 Oct-09 Mar-09 Nov-09 Jun-09 Sep-09 Dec-09 Dec-09 10 ASIA China and Asia: net food imports growing Dairy products and eggs Edible vegetable oils (including palm oil) (U S $ m n ) 120 (US$mn) 1,200 100 1,000 80 800 60 600 40 400 20 200 0 0 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Nov-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 China drought monitor (Dec 2009) Soft commodity basket Name Bloomberg Local price (24 Ratings code Dec 2009) China Green 904 HK 7.6 Buy United UNTP IN 165.6 Buy Phosphorous Noble NOBL SP 3.14 Buy Olam OLAM SP 2.58 Neutral © Nomura International (Hong Kong) Limited Source: Bloomberg, Nomura International (Hong Kong) Limited – 11 Investment Strategy Source: Bloomberg, CEIC data, Nomura International (Hong Kong) Limited — Investment Strategy ASIA Asian telecoms Asian telecoms: undervalued Over(+) / Under(-) Bloomberg Consensus forecast ** Next Dividend Valuation against Country Company Code Price* PER (x) PBR (x) Div. yield (%) ROE (%) Declaration ex-dividend Amount Currency the USD, % *** Hong Kong China Telecom 728 HK 3.17 15.7 1.0 2.3 6.7 24-Mar-10 22-Apr-10 0.085 HKD -51.9 Korea SK Telecom 017670 KS 175000 9.6 1.3 5.4 n/a 25-Jan-10 29-Dec-09 8400 KRW -19.6 Taiwan Taiwan Mobile 3045 TT 60.9 14.1 3.7 6.7 26.7 4-Mar-10 6-Jul-10 4 TWD -35.1 Malaysia DiGi.Com DIGI MK 21.66 16.4 9.9 7.5 57.1 7-May-10 3-Jun-10 0.5 MYR -44.7 Philippines Philippine Long TEL PM 2605 12.0 4.5 7.2 38.1 2-Mar-10 15-Mar-10 80 PHP -40.2 Distance Telephone Company Singapore Singapore Telecom ST SP 3.05 12.8 2.2 4.4 17.5 12-May-10 5-Aug-10 0.072 SGD -16.2 Thailand ADVANCED INFO ADVANC TB 85 14.7 3.5 7.4 23.6 18-Feb-10 16-Apr-10 3 THB -45.7 SERVICE * price as of 23 December 2009, local currency; ** current fiscal year; ** Local currency valuation based on Big Mac index which measures currency valuation using purchasing power parity Asia ex JP: Telecoms relative to stock exchanges 160 150 140 130 120 110 100 90 80 70 60 Feb-09 Feb-08 Feb-07 Feb-06 Nov-09 Nov-08 Nov-07 Nov-06 Nov-05 Source: Bloomberg; Nomura International (Hong Kong) Limited – Investment Strategy May-09 Aug-09 May-08 Aug-08 May-07 Aug-07 May-06 Aug-06 © Nomura International (Hong Kong) Limited 12 ASIA Asia Pacific: Big Mac index (measured using purchasing power) Country Big Mac Price Exchange Over(+) / Under(-) in local currency in US dollars Implied Rate Valuation against PPP rate + 1 USD = the USD, % ++ US 3.57 3.57 --- 1 --- Australia A$ 4.34 3.84 1.22 1.08 13.40 China Yuan 12.5 1.83 3.5 6.83 -48.73 Hong Kong HK$ 13.3 1.72 3.73 7.75 -51.87 Indonesia Rupiah 20900 2.19 5854 9390.00 -37.66 Malaysia Ringgit 6.77 1.97 1.9 3.37 -43.58 New Zealand NZ$ 4.9 3.59 1.37 1.34 2.23 Philippines Peso 99.39 2.13 27.8 46.76 -40.55 Singapore S$ 4.22 3.01 1.18 1.38 -14.71 South Korea Won 3400 2.91 952 1153.13 -17.44 Taiwan NT$ 75 2.33 21 32.12 -34.62 Thailand Baht 64.49 1.93 18.1 33.16 -45.42 + The Purchasing Power Parity (PPP) rate is the local Big Mac price divided by its price in the United States.