Light at the end of the tunnel
We are moving into the second phase of the Investment Wheel, a period
characterized by the outperformance of cyclicals including:
􀂃 Industrials
􀂃 Materials
􀂃 Consumer discretionary
Our positive view is driven by:
􀂃 Early signs of a improvement in domestic liquidity and dollar weakness.
􀂃 Cyclically adjusted P/E ratios moving into cheap territory.
􀂃 Signs of a peak in market volatility and cost of equity.
We are raising our 12-month index forecasts for MSCI Asia Ex Japan,
implying 16% upside from current levels. Changes to country allocations
include raising Korea to OVERWEIGHT and reducing ASEAN to
UNDERWEIGHT. This reflects the greater cyclicality of Korea relative to the
defensive nature of ASEAN markets.
We do not underestimate the challenges facing global and regional
economies. Our economists have once again lowered their global and
regional growth forecasts. The G3 are forecast to shrink 4.2% in 2009. Asia
Ex Japan Ex China GDP will witness a 1% contraction. Exports remain under
pressure, industrial output is extremely weak and unemployment is rising. The
key issue for investors is whether the market has discounted these negatives,
we believe the answer is yes. We forecast a V shaped recovery for equity
markets, driven by improving liquidity, a peak in market volatility and a weaker
dollar. This will be followed by a prolonged L given the absence of a catalyst
for earnings.

Contents
Asset allocation recommendations ................................................................................ 3
Overweight cyclical markets, underweight defensives 3
Upgrading Korea and Taiwan 3
The Investment Wheel 5
Increase equity and equity-linked issuance 6
Dollar weakness: good news for Asia 6
Early signs of improving liquidity 8
Cyclically adjusted P/Es 9
CoE peaks, equities bottom 11
Outlook for volatility 12
Investment implications 13
Country section............................................................................................................ 14
China 14
Korea 16
Taiwan 18
India 20
Hong Kong 22
Singapore 24
Malaysia 26
Thailand 28
Indonesia 30
Appendices ................................................................................................................. 32
1. Country asset allocation model 32
2. Asian key macroeconomic forecasts 37