Asian Exporters: To Be or Not To Be
 Key Debate: Shares of Asian exporters have risen on the back of weaker currencies, notably in Korea and India. More recently,
currency appreciation versus the US$ has hurt the shares of exporting companies. The key debate is whether the market is justified
in doing this. While weaker currencies provide some competitiveness, is there a case that the businesses of these companies have
fundamentally improved and made earnings less sensitive to currency flux? Have these companies hedged forex exposures
naturally or otherwise to reduce earnings sensitivity to currency changes? Is the US$ cross rate an appropriate measure of
currency exposure given that the earnings of some of these companies are dependent on other cross rates?
 Investment Conclusion
Our cross-geographical and sectoral work reveals the following conclusions:
 Currency view: The Korean won and Taiwan dollar are undervalued while the Indian rupee is at a fair level, especially against the
US dollar. Two-thirds of the won undervaluation versus the Japanese yen has unwound.
 Korea: Gains in global market share are not reliant on a weak currency but on sustainable structural changes. Won/US$ is not the
key driver for the share prices of Samsung or Hyundai. Indeed, productivity and utilization rates seem to be more critical.
 India: Stocks correlate positively with the Rs/US$ notwithstanding the negative effect of Rs appreciation on earnings. Shares of
tech companies are a good hedge against Rs depreciation and mostly underperform the market when the currency is rising.
 Taiwan: Watch the EUR/NT$ cross for OEM; watch US$/NT$ for EMS/ODM; and for components pay attention to US$/NT$ but
also Rmb/US$.
 Japan: Won/¥ cross is critical for Japanese auto companies while the consumer electronics sector is more geared to EUR/Yen
than USD/Yen. The weaker dollar presents a buying opportunity in Japanese auto names.
 Derivatives trade: Our derivatives team notes that the weak dollar impact is smaller than that implied by the share price reaction in
the Japanese auto sector and recommends upside exposure through an options strategy of selling OTC risk reversals.