asia pacific equities malaysia may 8th 2013

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CIO WM Research 8 May 2013

Asia Pacific equities A comfortable but unconvincing victory in Malaysia

• Asia ex-Japan equities performed well in April after a poor showing

in the first quarter. We expect this outperformance to continue

given the market's still-attractive valuations and good growth

prospects.

• South Korea and India remain our Most Preferred markets, whileSingapore is Least Preferred. South Korea has done well since the

easing of tensions with North Korea and the stabilization of the yen.

In India, sharply lower gold and oil prices have boosted sentiment.

• Although Malaysia's recent elections have removed a major

overhang with the victory of the ruling coalition, greater challenges

lie ahead given the racial and socioeconomic divide that emerged

after the vote. We do not expect Malaysia's outperformance to last,

and thus maintain our Neutral rating on the market.

After a poor showing in the first three months of 2013, Asia ex-Japan

equities (AxJ) performed well in April relative to developed market equities.

Can this outperformance continue? We have previously highlighted thata strong US Dollar Index (DXY) has always negatively affected the

performance of AxJ equities, and indications are that the DXY has peaked

and begun to stabilize (see Fig. 4).

Although MSCI AxJ has risen from the early April low of 1.58x price to book

value (P/BV) to the current 1.6x, it is still trading at a significant discount

to the 2x P/BV of MSCI World, offering better growth prospects and value

than developed market equities.

We made strategic changes to our AxJ strategy in early April, with the

key changes being a downgrade of China to Neutral, and an upgrade

of Malaysia to Neutral and of India to Most Preferred. We also kept our

Most Preferred rating on South Korea, leaving Singapore as our only LeastPreferred market. The performance of these markets has been largely in

line with our expectations so far (see Fig. 5).

Kelvin Tay, Regional CIO, Southern APAC, UBS AG

[email protected]

Cheryl Chian, analyst, UBS AG

[email protected]

Fig. 1: Equity market performanceTotal returns in USD

-2.6%

7.3%

2.1%

13.9%

-5.2%

8.8%

24.4%

7.0%

4.8%

11.5%

2.1%

-0.1%11.8%

6.0%

5.9%

7.8%

2.0%

3.9%

6.9%

7.2%

4.0%

4.6%

4.7%

5.2%

4.1%

4.8%

-20% -10% 0% 10% 20% 30%

China

Hong KongIndia

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Asia ex-JP

EM

World

Year to date return (%) 1-month return (%)

Source: Factset, MSCI, UBS, as of 6 May 2013

Fig. 2: Asian equity market performanceMSCI Asia ex-Japan versus MSCI World;standardized to 100 in May 2010

80

90

100

110

120

130140

150

May-10 May-11 May-12 May-13

Asia ex-Japan World

Source: Factset, MSCI, UBS, as of 6 May 2013

This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 6. Past performance is no indication of future performance. The

market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication.



India has been one of the best performers since we upgraded the market in

early April, with MSCI India returning 7.7% as of 6 May and outperform-

ing AxJ by 2.5%. Lower inflation suggests the Reserve Bank of India will

have the capacity to ease policy rates further to stimulate the economy. Thesharply lower gold and oil prices in recent months have also been positive

for the Indian fiscal deficit and hence the Indian rupee.

South Korea remains one of our two favorite markets. The combination of

cheap valuations (with MSCI Korea currently trading at 1.1x P/BV) and eas-

ing political tensions in the Korean Peninsula has resulted in a recovery of

both the stock market and the Korean won over the last month. The sta-

bilizing of the Japanese yen to 98–99 per US dollar has also helped Korean

equity sentiment. However, we believe these are still early days for Korea's

market outperformance, and we maintain our Most Preferred rating.

Although MSCI Singapore is near its five-year highs, the market has under-

performed MSCI AxJ over the last few weeks as risk appetite returned tothe Asian equity markets. Being a more defensive market, Singapore tends

to outperform during periods of risk aversion. It did so starting February,

when jitters over Europe took hold, despite poor manufacturing and export

numbers from the Singapore economy. However, when positive US data,

receding concerns over Cyprus, and the easing of tensions between North

and South Korea in April led to a recovery in risk appetite and a surge in

AxJ market performance, Singapore underperformed.

Impact of BN's win on Malaysia

We upgraded Malaysia to Neutral in early April as we felt that the stock

market had largely priced in a victory by the ruling Barisan Nasional (BN)

coalition, but with a lower majority than in the previous general election.

The election results are in line with our view: BN won with a majority 60%,lower than the 63% in 2008, based on a historically high voter turnout

of 80%.

However, the outcome was above the market's expectation of an even low-

er majority for BN. This is likely to be positive for both the Malaysian ring-

git and the stock market over the short term (see Fig. 6), as it removes

a significant overhang that has plagued the market for much of the last

12 months. That said, one crucial fact is that BN lost the popular vote,

polling in only 46.5% compared to the opposition's 49.9%. The election

also exposed critical rifts in the Malaysian population, with the society split

between racial and socioeconomic fault lines.

BN secures legitimacy comfortably, but not convincingly

Given the unconvincing but nonetheless comfortable margin by which the

BN coalition secured political legitimacy (there were widespread allega-

tions of vote-rigging, vote-buying, and electoral fraud), Prime Minister Najib

Razak may face some challenges to his leadership in the coming months,

although a change in the stewardship of UMNO, one of the coalition's three

parties, led by Razak, is unlikely.

Over the next three months, we would look out for the formation of a new

cabinet, the timing of the next UMNO general assembly, and announce-

ments on economic priorities as possible market movers.

Fig. 3: Asia ex-Japan country preferences

Current most

preferred markets

Current least

preferred markets

India Singapore

Korea

Source: UBS, as of May 2013

Fig. 4: DXY performanceA strong negative correlation between the US dollarand MSCI Asia ex-Japan market performance

60

70

80

90

100

110

120

1997 1999 2001 200 200 200 200 2011 2013

100

200

300

400

500

600

700

800

DXY Index (LHS) MSCI Asia ex- Japan (RHS)

Source: Bloomberg, UBS, as of May 2013

Fig. 5: Relative market performance since earlyAprilUSD total returns compared to MSCI Asia ex-Japan

-1.2%-1.1%-0.9%-0.8%

0.7% 0.7%

1.9% 2.0%2.5%

-3.3%-4%

-3%

-2%

-1%

0%

1%

2%

3%

I n d o n e s i a

T h a i l a n d

S i n g a p o r e

K o r e a

T a i w a n

H o n g K o n g

C h i n a

M a l a y s i a

P h i l i p p i n e s

I n d i a

Outperform

Underperform

Source: Bloomberg, UBS, as of 6 May 2013

Asia Pacific equities

UBS CIO WM Research 8 May 2013 2



Short-term outperformance expected...

With the election results exceeding market expectations, we believe MSCI

Malaysia is likely to outperform its regional peers over the near term, as the

Malaysian market has been a laggard over the past 12 months and is there-fore likely to play catch-up. Indonesia, Thailand and the Philippines have all

rallied sharply this year and therefore, in terms of valuations, Malaysia is

now rather attractive on both 12-month-forward P/E and P/BV terms rela-

tive to its neighboring markets.

Furthermore, over the short term, there could be a rotation of capital from

some of these markets to Malaysia to take advantage of the lower valua-

tions and the removal of the biggest uncertainty that was hanging over

the market.

The win for BN suggests a continuation of the Economic Transformation

Program, which is the government's cornerstone investment program, and

the Iskandar Development Project. These should continue to support GDPgrowth. Likewise, the backlog in potential IPOs and government infrastruc-

ture projects is likely to be cleared in the months ahead, while foreign direct

investments are likely to reverse the outflows experienced over the last few

months, when the political uncertainty was at its peak.

...but Malaysia likely to struggle over the medium term

The bigger question is whether this positive run will be sustainable on

a long-term basis. While the election results are clearly positive for the

Malaysian capital markets, outperformance on a sustained basis may be

difficult, as the long-term challenges are pretty significant, despite all the

short-term positives.

For example, the election laid bare the fact that the Malaysian society has

become increasingly divided. The incoming administration will have to deal

with a Malaysia that has become polarized along racial lines, as made evi-

dent by BN's loss of Chinese voters to the opposition and the swing of

Malay voters to UMNO, as well as along social lines, with urban voters root-

ing for the opposition and the rural poor sticking with BN.

There are also the tricky issues of the loss to the opposition of Gelang Patah,

a key area in the Iskandar Development Project, and the implementation

of promised populist measures in the run up to the election that will shift

the focus back to the fiscal deficit.

Although the election results have removed a major overhang on the

Malaysian market, our view is that the medium- to long-term challenges

are now greater in light of the racial and socioeconomic divide that the

election has thrown up. We do not expect the market's current outperfor-

mance to last, and therefore maintain our Neutral rating on Malaysia.

Fig. 6: Malaysia outperformed on election

results

Positive performance may not be sustained in the

longer term

90

92

94

96

98

100

102

104

106

108

110

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13

Asia ex-Japan Malaysia

Source: Factset, UBS, as of 6 May 2013

Fig. 7: 12-month-forward price-to-earningsratios

MSCI Malaysia vs. Indonesia, Thailand, Philippines

4

6

8

10

12

1416

18

20

22

May-08 May-09 May-10 May-11 May-12 May-13

Philippines: 12-m forward PE Indonesia: 12-m forward PE

Thailand: 12-m forward PE Malaysia: 12-m forward PE

Source: Factset, UBS, as of 3 May 2013





Fig. 8: Market valuations and ratingsas of 3 May 2013

CountryRelative toHistorical

Relative toRegion

EarningsGrowth

Current5-yr

HistoricalRelative toHistorical

Relative toRegion

ROE Current5-yr

HistoricalMarket rating

YTDperformance

China -18.4% -19.2% 10.9% 9.1x 11.2x -24.8% -3.5% 14.7% 1.6x 2.1x Neutral -2.6%

Hong Kong 1.6% 36.1% 5.6% 15.3x 15.1x -0.9% -15.1% 8.4% 1.4x 1.4x Neutral 7.3%

India -3.9% 25.5% 13.1% 14.2x 14.7x -8.8% 59.6% 15.5% 2.6x 2.8x Most Preferred 2.1%

Indonesia 16.6% 32.7% 13.0% 15.0x 12.8x 5.9% 150.0% 21.7% 4.0x 3.8x Neutral 13.9%

Korea -15.1% -27.7% 21.1% 8.1x 9.6x -12.5% -30.4% 12.7% 1.1x 1.3x Most Preferred -5.2%

Malaysia 3.0% 30.2% 5.4% 14.7x 14.2x 1.7% 29.9% 13.1% 2.1x 2.1x Neutral 8.8%

Philippines 45.3% 87.5% 8.4% 21.1x 14.6x 40.9% 126.2% 14.8% 3.7x 2.6x Neutral 24.4%

Singapore 8.8% 28.2% -1.8% 14.5x 13.3x 1.7% 1.1% 10.2% 1.6x 1.6x Least preferred 7.0%

Taiwan -8.5% 27.6% 27.2% 14.4x 15.7x 6.3% 15.6% 11.9% 1.9x 1.8x Neutral 4.8%

Thailand 17.6% 11.9% 13.6% 12.6x 10.7x 27.7% 57.7% 17.3% 2.5x 2.0x Neutral 11.5%

Asia ex-Japan -7.2% NA 13.7% 11.3x 12.2x -7.4% NA 12.8% 1.6x 1.7x N/A 2.1%

12-month Forward P/E Price/Book Value

Source: Factset, MSCI, UBS, valuations as of 3 May; year-to-date performance as of 6 May.

Fig. 9: Economic growth forecastsReal GDP; % change y/y

2010 2011 2012 2013F 2014F

China 10.4 9.3 7.8 8 8

Hong Kong 6.8 4.9 1.4 4 4.5

India 9.3 6.2 5 6.5 7

Indonesia 6.2 6.5 6.2 6.3 6

Malaysia 7.2 5.1 5.6 5.5 5

Philippines 7.6 3.9 6.6 6.3 5.6

Singapore 14.8 5.2 1.3 2.5 4.5

South Korea 6.3 3.7 2 2.8 3.5

Taiwan 10.8 4.1 1.3 4 4.2

Thailand 7.8 0.1 6.4 6 4.5

Asia ex-Japan 8.9 6.7 5.7 6.3 6.5

Source: Thomson Reuters, UBS, as of 30 Apr 2013





Fig. 10: Inflation forecastsCPI; % change y/y

2010 2011 2012 2013F 2014FChina 3.3 5.4 2.6 3 4

Hong Kong 2.3 5.3 4.1 4 4.1

India 9.7 8.1 8.2 7.4 7

Indonesia 5.1 5.4 4.3 6 5.5

Malaysia 1.7 3.2 1.7 2.7 3.8

Philippines 3.8 4.7 3.1 3.5 4

Singapore 2.8 5.3 4.6 3.5 2.8

South Korea 2.9 4 2.2 2.2 2.6

Taiwan 1 1.4 1.9 1.4 1.6

Thailand 3.3 3.8 3 3.2 3.1

Asia ex-Japan 4.4 5.3 3.7 3.9 4.3


Fig. 11: Interest ratesin %

30-Apr-13 6 months 12 months End 13

CNY 3M Shibor 3.9 4.2 4.2 4.2

CNY 10Y Gov 3.4 3.7 3.7 3.7HKD 3M Hibor 0.4 0.4 0.5 0.5

HKD 10Y Gov 0.9 1.2 1.4 1.3

INR 3M T Bill 8.5 8.5 8.5 8.5

INR 10Y Gov 7.8 7.5 7.7 7.6

IDR 1M SBI yield 4.9 5.1 5.1 5.1

IDR 10Y Gov 5.5 5.7 5.7 5.7

MYR 3M Klibor 3.2 3.2 3.5 3.4

MYR 10Y Gov 3.4 3.7 3.8 3.8

Phibor 3M T Bill 0.5 3.5 3.5 3.5

PHP 10Y Gov 3.5 4.5 4.8 4.7

SGD 3M Sibor 0.4 0.4 0.4 0.4

SGD 10Y Gov 1.4 2.1 2.1 2.1

KRW 3M CD 2.8 3 3.3 3.2

KRW 10Y Gov 2.8 3.2 3.5 3.4

Taibor 3M CP 0.9 1.1 1.4 1.3

TWD 10Y Gov 1.2 1.3 1.5 1.4

THB 3M Bibor 2.9 3.2 3.2 3.2

THB 10Y Gov 3.4 3.8 3.8 3.8






Appendix

Terms and Abbreviations

Term / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionA actual i.e. 2010A bn Billion

CPI Consumer price index E expected i.e. 2011E

GDP Gross domestic product NV Neutral View: The stock is expected to neither

outperform nor underperform the relevant

benchmark nor significantly appreciate or

depreciate in absolute terms.

p.a. Per annum (per year) P/BV Price to book value

Shares o/s Shares outstanding UP Underperform: The stock is expected to

underperform the sector benchmark

WMR UBS Wealth Management Research CIO UBS WM Chief Investment Office

y/y or YOY Year-over-year; year on year





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