The long climb back
􀀗 Improving macro data and newsflow mean that equities
could remain buoyant for a while longer
􀀗 But structural problems in the global economy have not gone
away, so this is unlikely to turn into a sustainable bull market
􀀗 We recommend taking cyclical exposure but minimising other
risks: we like Singapore, India, Taiwan and cyclical blue-chips

Macro data and newsflow are likely to improve over the next few months. Economic
indicators such as exports are showing the first signs of bottoming and lead indicators –
notably the US manufacturing ISM – point to them improving further. Asian equities
should continue to benefit from this. But, after a 24% rally in the past few weeks, some of
this is already priced in. What may not be priced in yet is that analysts’ and economists’
forecasts for 2009, and analysts’ stock recommendations, are very cautious. The
momentum of these is likely to turn up – which could give a further boost to stocks.
It is too early to say whether this is just a bear market rally, or whether stocks have found
a bottom. It doesn’t matter much. Nasty bear markets in history have often seen 50%
rallies; the first leg-up after a bear market ends is typically about the same. This suggests
that for now, there is more upside than downside risk for equities. But it is true that the
upside is easier to foresee than the downside. Too many problems lurk out there to make
us confident that this is the start of a new sustainable bull market. The most likely
scenario is that the economy will double-dip and equities will face a rough period again
later in the year. We continue to believe that Asian equities will end this year ±10% from
their level at the beginning – in the first three months of the year they were flat.
How to play this as an investor? Our recommendation (not so different to last quarter) is
to take some exposure to the cyclical pick-up while minimising other risks. We increase
slightly our weightings in cyclical sectors: we are overweight industrials and energy and
raise consumer discretionary, IT and financials to neutral. We go underweight expensive
defensive sectors like utilities, healthcare and telecoms. Most of all, we recommend a
portfolio of cyclical blue-chip stocks – although, admittedly, it is harder to choose these
after the recent run-up. We also suggest some names for a higher-beta punchy portfolio.
Among markets, we would take our cyclical exposure in Taiwan (which we raise to
overweight) and Singapore. We prefer these to Japan and Korea: Singapore is structurally
safer; Taiwan has the advantage of improving cross-Strait relations. We lower China to
neutral after its 50% rise since October and because we see no further short-term catalysts.
We prefer India (we stay overweight), where growth will pick up later this year and which
will offer an attractive investment opportunity once the general election is out of the way.

Investment strategy 4
The long climb back 4
Market recommendations 16
Cyclical exposure… 16
Sector recommendations/
investment themes 21
Stick to quality cyclicals 21
Main markets 25
Japan (neutral) 26
China (neutral) & Hong Kong (neutral) 28
Korea (underweight) 32
Taiwan (overweight) 34
India (overweight) 36
Other markets 39
Australia 40
Singapore 41
Malaysia 42
Indonesia 43
Thailand 44
Philippines 45
Datapack 46
Country/ Sector performance 46
Earnings 48
Valuation 49
Supply & demand 50
Politics and risk 51
Sectors and stocks 52
Economic forecasts 56
Top stock picks 57
AU Optronics, 2409 58
Bank of China, 3988 59
China Agri, 606 60
China BlueChemical, 3983 61
CCC, 1800 62
Chinatrust, 2891 63
CIIH, 966 64
Fubon, 2881 65
Innolux Display, 3481 66
Maanshan, 323 67
Pacific Basin, 2343 68
Punjab National Bank, PNB 69
Reliance Industries, RELI 70
Shanghai Electric, 2727 71
Siliconware Precision, 2325 72
Sinopec, 386 73
Sinotrans, 598 74
State Bank of India, SBIN 75
Swire Pacific ‘A’, 19 76
ZTE, 0763 77
Disclosure appendix 78
Disclaimer 81
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