1。 US　Ｅｃｏｎｏｍｉｃｓ　Ａｎａｌｙｓｔ

Credit Likely to Crunch Nonresidential Construction

! .Nonresidential construction. includes

several highly distinct subsectors, each of

which marches to its own drummer. For

instance, overall GDP growth plays a large

role in the decision whether or not to build

a new strip mall, while the price of oil is

important for the building of new offshore

platforms.yet both count as

nonresidential structures investment.

.Nonresidential construction. includes
several highly distinct subsectors, each of

which marches to its own drummer. For

instance, overall GDP growth plays a large

role in the decision whether or not to build

a new strip mall, while the price of oil is

important for the building of new offshore

platforms.yet both count as

nonresidential structures investment.

! To account for this heterogeneity, we

construct separate models for the different

subsectors of nonresidential construction.

Our results show that the credit crunch is

likely to weigh heavily on commercial and

office construction over the next year,

while power and mining construction are

likely to continue growing. In aggregate,

our results are consistent with a drop of

5%-10% in real terms over the next year.

To account for this heterogeneity, we
construct separate models for the different

subsectors of nonresidential construction.

Our results show that the credit crunch is

likely to weigh heavily on commercial and

office construction over the next year,

while power and mining construction are

likely to continue growing. In aggregate,

our results are consistent with a drop of

5%-10% in real terms over the next year.

! Unfortunately, our uncertainty is relatively

high, especially regarding the timing of the

downturn. This is because the lags are

long and our data on credit conditions.

the most important driver of nonresidential

structures investment.stretches back less

than 20 years, limiting the power of our

statistical results.

Unfortunately, our uncertainty is relatively
high, especially regarding the timing of the

downturn. This is because the lags are

long and our data on credit conditions.

the most important driver of nonresidential

structures investment.stretches back less

than 20 years, limiting the power of our

statistical results.

! We disagree with the FOMC.s statement

that the risk of a .substantial downturn.

has diminished over the past six weeks.

Although the GDP numbers continue to

look a bit better than expected, a range of

other indicators have worsened sharply.

We disagree with the FOMC.s statement
that the risk of a .substantial downturn.

has diminished over the past six weeks.

Although the GDP numbers continue to

look a bit better than expected, a range of

other indicators have worsened sharply.

.substantial downturn.
has diminished over the past six weeks.

Although the GDP numbers continue to

look a bit better than expected, a range of

other indicators have worsened sharply.

! First, stress levels in the financial markets

are rising anew, and financial conditions

are now tighter than at the time of the Bear

Stearns/JP Morgan Chase deal. Second,

consumer confidence measures continue to

plumb new lows; for the first time in at

least 40 years, a plurality of households

now expect their (nominal) income to

contract. Third, the factory sector may be

on the verge of a significant contraction.

First, stress levels in the financial markets
are rising anew, and financial conditions

are now tighter than at the time of the Bear

Stearns/JP Morgan Chase deal. Second,

consumer confidence measures continue to

plumb new lows; for the first time in at

least 40 years, a plurality of households

now expect their (nominal) income to

contract. Third, the factory sector may be

on the verge of a significant contraction.

２．　China: Portfolio Strategy

China Stance-at-a-Glance

July 2008: Headwinds remain, but value starting to surface

Worsening growth/inflation mix, heightened policy and

earnings risks, and surging commodity prices continue to

weigh on the equity market. Current H- and A-share prices

seem to have priced in a fair amount of cyclicality/earnings

risk and present long-term value to investors, in our view.

We stress the importance of making careful entry points.

H-share market: Value emerging as trading range bottoms

A deteriorating macro backdrop, together with concerns about domestic

policy risks, disappointing earnings news and rising commodity prices,

continues to weigh on investor sentiment toward the H shares. HSCEI lost

11.5% in June as risk appetite further declined. We see value emerging, as

the index is now close to the lower end of our expected trading spectrum

of 14,800 to 12,000. We are lowering our 12-m index target for HSCEI to

14,800 from 15,800 to discount downside EPS risks. We would look to

accumulate positions if market weakness extends and would proactively

engage in a potentially range-trading market to gain directional beta.

A-share market: Back to reality

After correcting over 49% from last year’s peak and 44% ytd, A-share

valuations have become reasonable, in our view, at 17.3X consensus 08E

EPS. We have lowered our 12-m index target for CSI 300 to 2820 from 4700

to reflect our cautious earnings outlook for A shares amid a challenging

business environment. We think current prices represent good long-term

buying opportunities for investors who can tolerate short-term volatility.

Performance

In June 2008, our buy stocks lost 12.9% and our funding stocks fell 11.8%,

resulting in a negative spread of 117 basis points (bp) in local currency

total return terms. Ytd, our buy/funding spread is -1.1 pp. Since inception

(April 2005), our buy/funding spread has been 190.9 pp.

3. Asia Pafici: Portfolio Strategy

Still Wary; prefer "Tai-rea"

Back at 1Q lows: what's priced in?

With Asian equities back at 1Q lows, the key questions are (a) how

much macro risk is priced in, and (b) will fundamental risks rise? To

address this, we examine regional valuations in terms of historical

ranges, DDM fair value, and versus inflation and earnings.

Valuations should be low in current conditions

Valuations are not yet at levels that indicate risks have been fully

priced, particularly since central banks are behind the curve, oil prices

and inflation are rising, and corporate profit forecasts are likely to fall.

Lower risk/reward estimates; still cautious

We lower our index price targets and assess near-term downside risk of

approximately 10-15%. We estimate12m total return upside potential to

be low-teens. We retain our cautious stance and continue to prefer

northern Asian markets to India and ASEAN.

"Tai-rea"; tactical asymmetric China exposure

Country allocations may not be the best way to think about Korea and

Taiwan now. We favor domestic demand stocks in Taiwan and

exporters in Korea over Taiwan’s external sector (mainly tech) and

Korean domestic demand. Use HSCEI options for a potential tactical

4.

4.Asia Pacific Morning Summary 6-30

Focus Items

Asia Pacific: Portfolio Strategy: Still wary; prefer "Tai-rea" 1

1
China Stance-at-a-Glance: July 2008: Headwinds remain, but value starting to

surface 2

2
Far Eastern Department Stores (2903.TW) Buy: Consumer revival + China

contribution take-off; initiate with Buy 3

3
Reliance Communications (RLCM.BO): Removed from Conviction Buy; maintain

Buy, TP cut to Rs678 4

4
India: Real Estate Developers: Stress test remedies for the party hangover 5

5
ASEAN: Multi-Industry: Conglomerate-Diversified: Shares may have retreated too

much, orderbook/oil px staying high 6

6
Philippine Long Distance (TEL.PS): Macro concerns overshadow a solid

company; D/G to Neutral 7

7
Key Data Changes