A Quick Equity Market Recap (27 Feb2008)

Led mainly by H-shares Banks (6%) and PingAn Insurance (+11%), Hang Seng Index so far has moved up + 3.37%, adding 882 ppts, while HSCEI adds + 4.98%, adding 664 ppts.

I. Sector Update

Consistent with my yesterday’s note, the banking Sector, inspired by the Standard Charter bank’s results (Income from mainland China + 72% to US$500mn), the street is buying Chinese H-share Banks ahead of earning reports, which many believe a stronger than expected 1Q08 results. Check with banking analysts confirmed most H-share banks continued to see NIM improvement so far. Like ICBC, continued to achieve record high quarterly fees and WM sales volume despite of a weaker equity market in the last few months. 2008/09 earnings were "virtually" unchanged even though WM fees to be cut by 18-24%. Fees growth will remain double digits and NIM is supported by favorable funding composition and better credit pricing power.

Insurance sector, YTD both PingAn (2318HK) and China Life (2628HK) have fallen ~30% till yesterday, 2X losses than HSI Index. After CSRC’s tightening oversight of corporate financing, market feels that negatives mostly factored in the PingAn stock price (Note: Citi recently cut TP from 104 to 78.5), after it dropped 35% ytd. By times, people start to see many potentially attractive long-term investment opportunities for PingAn, and we remain confident that the 16% dilution would be easily absorbed by fundamental earnings growth in 2008 and support the current placement. Post A-share placement, it is expect the A-H gap to narrow further as A-shares' free float increases substantially.

II. Macro Update

In Hong Kong, Today the Budget Speech by FS Mr John Tsang also helps boost the local market sentiment with a surplus HK government holding $115.6 billion, which is an all-time high, equivalent to 7.2% GDP. Economic wide, John forecast 2008 GDP to increase by 4-5%, unemployment rate will remain at a relatively low level. But underlying inflation rate in 2008 is estimated to rise to 4.5%t, while the inflation rate forecast will average 4% over the following four years.

In China, talks are focusing on) reducing stamp duty burden and ii) tightening oversight of corporate financing. Recently, Corporate China are sucking up Rmb82bn on a monthly basis (Rmb1trn annualized) from the A-share market, while newly floatable A-share could reach Rmb3trn in 2008 and Red-chip dual-listing another Rmb200bn. Unfortunately, A-share market liquidity supply dynamic has worsened dramatically – total household savings amounted to 14x of A-share floatable market cap in mid-2005 but dropped to a floor of 2x at present. A-share market valuation has de-rated 20-30% from its peak since last October and is currently traded at 22x consensus 12-month forward PE on 28% EPS CAGR for 2008-09.

III. Oversea Update

IBM’s $15 billion stock-buyback plan helped to propel the DowJones up 114.70 points, or 0.9%, to 12684.92. Other markets also saw notable rallies. Supply concerns pushed crude oil to a record settlement over $100/bbl, and the EURO climbed to a record against the US Dollar due to higher probability of an interest-rate cut at March FOMC meeting.

Data wise, it was ugly, witnessed by a surge in producer price inflation, a plunge in consumer confidence, continued deterioration in home prices, and another weak regional manufacturing survey - supported good front-end gains by the Treasury market Tuesday. The stag-flationary nature of the data also supported a significant UST yield curve sweetening.

Moreover, Fed Vice Chairman Kohn spoke yesterday on The U.S. Economy and Monetary Policy. Here are the key extracts:

ü         Growth: He said that after the negligible growth in Q4, early indications are that growth remained "very sluggish" in the first quarter, noting weak retail sales and IP data, widespread declines across business and consumer surveys, and the weakness in January employment that based on claims data appears to have continued in February. 

ü         Inflation: At the same time, recent inflation news has been "disappointing," as "higher costs of energy, a pickup in prices of imported goods, and, perhaps, the persistent upward price pressures in commodity markets may be passing through a bit to core consumer prices."

ü         Housing Markets and Financial System: The lower rates "will not stop, only cushion" the correction in.  And the "adjustment in financial markets is part of the process that ultimately will restore credit allocation and market functioning to a sounder, more sustainable basis," eventually resulting in a "safer system, but one with more bank intermediation, less leverage, and higher financing costs for many borrowers."

ü         The key issue the economy faces is the stress on the financial system, which has resulted in a "drying up of large portions of mortgage finance," wider "spreads on household and business debt in securities markets," decreased "availability of bank credit," weaker stock prices, and a broadly based tightening in lending standards as seen in the Fed's Senior Loan Officer Survey.

Overall, based on the recent market behaviors, it seems the market has been divided into two camps --- 1) 1rofessional investors say the fundamental threats of recession, inflation and falling corporate profits still loom large as ever in the months ahead; 2) Short-term speculators/optimists are rushing in to bet either that the market has adequately factored in the remaining risks, or that it went too far in the dismal early going of 2008.

(The End)