global what caught my eye? v -...

Please refer to page 20 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

GLOBAL

Inside

A world of no scarcity = ‘commons’ & no prices or values 2 World of commons = disruption; ‘brains’ count but capital & labour do not 6 Disruption = aggressive public sector; China as a guiding light 9 Investment – either ignore or embrace the governments. We prefer to ignore. 12 Appendices 15

MQ Asia ex JP ‘Quality/Sustainable Growth’ portfolio perf. (rel to MXASJ US$)

Source: Bloomberg; Macquarie Research, October 2016; Refer Fig 9 for footnotes

MQ Global ‘Thematics’ portfolio performance (rel to MSCI AC World, US$)

Source: Bloomberg; Macquarie Research, October 2016; Refer Fig 12 for footnotes

Analyst(s) Viktor Shvets +852 3922 3883 [email protected] Chetan Seth, CFA +852 3922 4769 [email protected]

7 October 2016 Macquarie Capital Limited

What caught my eye? v.65 Is China ‘a shining city upon a hill’? In the latest issue, we ask why the rest of the world increasingly looks like China.

In the ’80s, Reagan had frequently compared the US to a biblical ‘city upon a hill”

and for him, it was meant to represent the world’s best and highest aspirations.

Why would we describe China as today’s ‘shining city upon a hill’? Reagan’s

view of the US as “a tall, proud city... teeming with people of all kinds living in

harmony and peace... with doors open to anyone”, no longer truly describes US

reality. Neither does it describe China. However, China more than any other

country, may illuminate the most likely immediate future for all of us.

What makes China unique is its lack of separation between fiscal, monetary

and banking policies as well as blurred distinctions between private and public

sectors. We maintain that most other economies are likely to embrace similar

policies, as there are few other (if any) socially palatable alternatives to the

current secular stagnation. We reside in a world where a financial ‘fireball’

(~US$300-600 trillion of financial instruments or 4x-8x global GDP) constantly

threatens to crush the underlying economy, which has long passed the

point of no return. Over-financialization and technological shifts ensure that

productivity remains constrained, precluding any deleveraging. In the absence of

stronger productivity, piling up financial instruments leads to inexorable erosion

in return on capital, whilst structural shifts depress ‘returns on humans’.

China’s business model provides one possible evolutionary answer. The

widely debated ‘helicopter money’ and full integration of fiscal and monetary

policies has already been in existence in China for at least a decade. Why would

anyone imitate it? In our view, there is no choice. The third Industrial revolution

and financialization are radically altering global economy and the role of capital

and labour, whilst also erasing most market signals. Although new technologies

do create their own demand, it is a highly dislocating process, eliminating

hitherto successful business models, dissolving labour markets and altering

societies. China’s state-capitalism and political economy offer a potentially

attractive answer (an aggressively proactive public sector to soften transition

pains). Monetary & fiscal spigots simply open and funds flow. There is however a

price to pay—atrophy of free markets and private sector signals and ultimately

further misallocation of resources. However, the alternatives could be worse.

Whilst most economies are already emulating China, LT structural trends are

even more disruptive. In this new world, ‘brains and knowledge’ would count for

far more than capital or labour. ‘Flexible & Soft’ would be a recipe for success

whilst ‘Inflexible and Hard’ presage declining returns. Value would even more

than usual concentrate in ‘zero to one’ (technology & innovation), leaving little

for scale players (‘one to n’). It means that over time countries (such as US)

with more flexible economies and stock of knowledge are likely to win, whilst

economies wedded to traditional infrastructure and supply chains would lose.

The move towards ‘flexible & soft’ is already becoming a strong trend.

What does it mean for investors? Ability to achieve quality growth in such

uncertain world should become ever more valuable. The same applies to

disruptive Themes. We continue to advocate avoiding public sector and tactical

macro calls whilst focusing on ‘Quality Sustainable Growth’ and ‘Thematics’.

Both portfolios continue to outperform (~3%-4% YTD), despite low stock

turnover and strong quality bias, illustrating that in a non-mean reversionary and

public sector-driven world, conventional cycles and sector rotations (i.e. cyclical,

defensives, income, value etc) are unpredictable with limited investment value.

95

100

105

110

115

120

125

130

135

Mar

-13

Jun

-13

Sep

-13

De

c-1

3

Mar

-14

Jun

-14

Sep

-14

De

c-1

4

Mar

-15

Jun

-15

Sep

-15

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

ASXJ "Quality and Stability" portfolio (rel to MSCI ASXJ, $ TR basis)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

7-Ju

n-16

14-J

un-1

6

21-J

un-1

6

28-J

un-1

6

5-Ju

l-16

12-J

ul-1

6

19-J

ul-1

6

26-J

ul-1

6

2-A

ug-1

6

9-A

ug-1

6

16-A

ug-1

6

23-A

ug-1

6

30-A

ug-1

6

6-Se

p-16

13-S

ep-1

6

20-S

ep-1

6

27-S

ep-1

6

4-O

ct-1

6

Excess returns (RHS) "Global Thematics" returns MXWD $

Macquarie Research What caught my eye? v.65

7 October 2016 2

A world of no scarcity = ‘commons’ & no prices or values One of the key issues that economics as a profession has had a major problem confronting is

that we are increasingly entering a world of no scarcity.

A world of abundance (indeed surplus) of financial capital, rapid decline in marginal costs of

producing and distributing goods and services as well as surplus of low productivity labour

inputs, is a world of disintegrating pricing signals and hence the end of market-based

economies. No scarcity means disappearance of conventional economics. It is a world where

conventional market pricing mechanisms no longer work; it is a world of commons, which

traditionally has been confined to margins of economic theory, as an exception, that needed

to be regulated and brought back into traditional economics via proper pricing and regulation.

It is a world of free co-operation between various actors and parties to produce products and

services that are either free or largely free (such as Linux software, Wikipedia, free

information sites, Uber, etc). In a world where technology, information and knowledge are the

key drivers, there is an almost unlimited scalability. This in turn undermines the basic tenets

of capitalist market-based economies (i.e. property rights; pricing signals under conditions of

scarcity). Increasingly, there are no longer exclusive rights to a given product or service but

instead these can be equally enjoyed by many parties simultaneously.

This new world also makes Solow’s classical growth model largely redundant (explaining its

multiple revisions as economists attempted to reconcile theory with reality). Now it is not so

much contribution of labour and capital that drives productivity and growth but rather as

Romer and Lucas were suggesting in the early 1990s, it is driven by human capital, which

encompasses not just conventional education and skilling but rather a far more oblique

concept of social capital. It includes variables as diverse as institutional settings, ease of

propagation of new technologies and innovation clustering. Unlike classical economics, scale

of social capital is infinite and hence marginal costs decline rapidly towards zero.

Whilst technologies do generate new demand, the transition stage from a world of scarcity to

a world of abundance is a highly complex affair. As in the case of transition from feudalism to

merchant capitalism (14th-16th centuries) and later on industrial capitalism (18th-19th

centuries), the current transition to the new post-modern world is likely to be highly

dislocating, as it redefines the nature of relationships between humans and society. We tend

to call it the ‘Third Industrial revolution’, but the current phenomenon has many other

descriptions (such as robotics and automation; technology age; rise of commons, etc). In a

world that remains dominated by states, borders, citizens, corporates, banks and the

Governments, ‘commons’ are threatening to undermine the key elements of economic and

social policies.

Inevitable reactions to these dislocations include:

1. Traditional corporates have been attempting to control property rights and margins

by embarking on increasingly more aggressive strategies of mergers and

acquisitions to strengthen their market dominance by creating monopolies and

oligopolies. In a world where ‘commons’ are becoming more prevalent, ability to

maintain margins is the key to survival;

2. Proliferation of unconventional corporates, which instead of defending intellectual

and other property rights, specialize in destroying conventional jobs and businesses

by embracing commons and leveraging new technologies, ideas and contribution of

a diverse set of actors whilst operating on a non-conventional work basis (i.e. think

of characters in the ‘Silicon Valley’ sitcoms);

3. Economies have become increasingly financialized by utilizing new technologies

and in response to declining productivity as certain sectors have became hyper

competitive, whilst the rest have gradually lost productivity. Also increasingly, the

flow of intellectual and social capital can no longer be measured with any degree of

precision (as ‘commons’ do not generate reliable price or value signals that could be

captured in conventional national statistics).

A new world of no

scarcity...

...‘commons’,

unlimited scalability

and marginal costs

rapidly declining to

zero

Corporates respond

through creation of

monopolies, whilst

society and politics

respond through

financialization

and...


7 October 2016 3

4. Financialization in many ways has been reflecting societal insistence on growth

and wealth creation that could no longer be satisfied through conventional

productivity and income growth rates. Hence, the state response over the last

three and a half decades was to ease popular access to finance and encourage

growth and asset creation via investment and leveraging. This inaugurated a period

when real estate morphed from basic utility into a key investment tool. The state also

removed many limitations on ability to move between jobs, whilst de-regulating

product markets.

5. Labour training and education has been acquiring a much greater degree of

urgency as individuals attempt to preserve whatever scarcity value they still

possess by trying to acquire various qualifications, as a sort of protective ‘shield’.

This explains why acceptance rates at Harvard, Stanford or MIT are now as little as

4%-5%. Indeed, if one ignores diversity and sports recruitment, for most

conventional students, the chances are closer to 2% (i.e. only slightly higher odds

than being hit by a bus). The demand overflow has also by now impacted the

second and third-tier institutions. This has contributed to rapid diminution in value of

degrees and certificates, as only the best and the brightest can benefit. Increasingly,

only the top 1%-5% (or well-connected, as certain things in life never change) can

leverage qualifications, whilst the rest are unlikely to derive much value.

The new age is in many ways completely different to the world of 19th and 20th centuries.

1. Whereas in the past, capital was always scarce/valuable and needed to be carefully

allocated (hence CAPM and corporate finance), the global economy now has

significant excess of capital. Indeed, the more we continue to financialize, the more

global economy drowns in an excess of capital. As a result, rate of return on

financial capital is on an inexorable decline. It is particularly evident in the financial

industry, as it tends to operate mostly in the ‘fireball’ of excess capital. As discussed

(here), global economy of around $75 trillion is maintaining ~US$300-600 trillion of

financial instruments (depending on how one allocates derivative exposure) and

there is no evidence that there is any ability of global economy to grow slower than

the pace of accumulation of debt and financial capital.

2. In the past two hundred years, role of capital investment was paramount.

Investment in physical infrastructure, factories and other places of production and

distribution were the key to higher productivity. However, over the last two decades,

it has been increasingly not physical infrastructure but rather far more broadly

defined accumulation of knowledge and the ability to transmit that knowledge at

almost lightning speeds, with limited constraints, that became the key productivity

driver.

It is the essence of non-exclusive or non-rival utilization of this knowledge

(consumption by one individual does not diminish utility or consumption by others)

that drives marginal prices to zero and accelerates scalability whilst proliferating

‘commons’ where multitude of participants cooperate (largely) for free to create new

products and applications (whether genome sequencing, Uber, Lift, Linux software,

Wikipedia). Whilst creating new products and business models, these innovations

also destroy traditional price and scarcity-driven (and previously successful) business

models. For example, rise of Wikipedia made sure that traditional encyclopaedias

would never survive. Since 1990, sales of Encyclopaedia Britannica have dropped

from 120,000 annually to less than 8,000. Another example is the Human Genome

Project, which initially indicated cost of sequencing at between US$300m and

US$1bn (late 1990s). The actual price had collapsed to US$14m by 2006 and today

it is less than US$1,000. Most of the new activities have an almost infinite

scalability and limited capital requirements.

3. The role of labour inputs and role of humans is being now radically reshaped

compared to the age of the First and Second Industrial revolutions. In 19th or

20th centuries, ability to skill labour (through various stages of primary, secondary,

tertiary levels) to complement machinery and infrastructure was the key.

...desperate

scramble for skilling

as labour markets

disintegrate

The new age is

characterized by

excess of capital...

...lower capital

intensity and...


7 October 2016 4

However, as highlighted (here and here), the Third Industrial Revolution is aiming to

completely replace humans, rather than just complement them, with potentially up to

half of current jobs and traditional professions in danger of extinction over the next

one or two decades. Indeed, one does not require a given specialization or

profession to go completely extinct, for relative and absolute pricing power of the

labour to suffer from considerable erosion. Drivers being replaced by autonomous

cars or Uber depressing returns of taxi medallions or telemarketers and conventional

accountants being rapidly replaced by artificial intelligence are examples of this

trend. Increasingly, routine articles by Forbes or various newspapers are written by

computers, with limited human involvement. The same applies to routine tasks

undertaken by investment analysts, whilst the job of equity and fixed-income traders

has already changed beyond recognition.

Essentially, traditional skilling of humans to work with conventional capital no

longer represents the ‘King’s Road’ to higher productivity. Whilst there is no

doubt that new jobs are being created, at least initially, these jobs tend to be mostly

inter-segmental transfers into places of low productivity with labour warehoused (for

lack of better word) in low-productivity jobs, pending final disposal and re-direction

into more resilient and useful occupations. If history is any guide, this process takes

decades to complete. In the meantime, what we view as a fruitless debate as to the

extent to which current productivity stagnation is being caused by cyclical vs. secular

factors or whether we might be mismeasuring ‘real productivity’ would rumble on.

Our view remains that the decline in productivity experienced over the last two

decades is primarily secular in nature and that we are not mismeasuring it. Indeed,

we think that it is far from clear whether humans can be truly skilled for the degree

and depth of forthcoming replacement, and this increasingly applies not only to

routine and low-skilled jobs but also to higher-value-added occupations.

Fig 1 Financial assets (US$ trillion) – at least 4x global GDP (possibly up to 10x) and rising

Fig 2 Global shadow banking (US$ trillion) – continues to grow; ~110% of global GDP

Source: McKinsey, BIS, Macquarie Research, October 2016 Source: BIS, Macquarie Research, October 2016

Fig 3 Genome pricing (US$’000) – log scale – rapid fall towards zero

Fig 4 Microprocessor cost per transistor (US$/T/KHz) – almost zero

Source: NIH, Macquarie Research, October 2016 Source: Singularity, Macquarie Research, October 2016

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

1990 1995 2000 2005 2010 2014

Global financial assets ($ trn)

Shadow Banking ($ trn)

Global financial assets (inc shadow banking), % of GDP (RHS)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0

10

20

30

40

50

60

70

80

90

1992 2002 2007 2015

Shadow Banking % of GDP

1

10

100

1,000

10,000

100,000

Se

p-0

1

Ma

y-0

2

Ja

n-0

3

Se

p-0

3

Ma

y-0

4

Ja

n-0

5

Se

p-0

5

Ma

y-0

6

Ja

n-0

7

Se

p-0

7

Ma

y-0

8

Ja

n-0

9

Se

p-0

9

Ma

y-1

0

Ja

n-1

1

Se

p-1

1

Ma

y-1

2

Ja

n-1

3

Se

p-1

3

Ma

y-1

4

Ja

n-1

5

Se

p-1

5

Cost per Genome Moore's Law

1E-19

1E-18

1E-17

1E-16

1E-15

1E-14

1E-13

1E-12

1E-11

1E-10

0.000000001

0.00000001

0.0000001

1976

1979

1982

1985

1988

1991

1994

1997

2001

2004

2007

2016

Microprocessor Cost per Transistor Cycle, $/Transistor/Hz

...redefinition of

nature of labour

contribution

Age of declining

return on capital

and ‘humans’


7 October 2016 5

Fig 5 DRAM (bits per US$) - ...becoming almost unlimited, with massive scale

Fig 6 New York – Yellow Taxis’ market share of rides (%) – declining towards 50% vs almost 100% in 2014

Source: Singularity, Macquarie Research, October 2016 Source: TLC, Macquarie Research, October 2016

Fig 7 US recorded music (in 2015, US$ m) – stabilizing after massive disruption at prices that are starting to approximate zero

Fig 8 US – personal consumption – direct securities spending (US$ m) – strong deflation of financial sector returns

Source: RIAA; Macquarie Research, October 2016 Source: BLS, Macquarie Research, October 2016

The above Figures illustrate the pace of ongoing financialization as well as the degree of

price and cost erosion across various activities that currently dominate ‘commons’ and

financial ‘fireball’.

100

1,000

10,000

100,000

1,000,000

10,000,000

100,000,000

1,000,000,000

10,000,000,000

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Dynamic RAM Price Bits per Dollar at Production (Packaged Dollars), DRAM Bits / Dollar

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

1/0

7/2

01

5

15/0

7/2

01

5

29/0

7/2

01

5

12/0

8/2

01

5

26/0

8/2

01

5

9/0

9/2

01

5

23/0

9/2

01

5

7/1

0/2

01

5

21/1

0/2

01

5

4/1

1/2

01

5

18/1

1/2

01

5

2/1

2/2

01

5

16/1

2/2

01

5

30/1

2/2

01

5

Yellow Taxis Share

0

2

4

6

8

10

12

14

16

18

20

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1975 1980 1985 1990 1995 2000 2005 2010 2015

US Recorded Music Revenue US$ per Unit of Volume

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Exchange-listed equities

Other direct commissions

Direct commissions


7 October 2016 6

World of commons = disruption; ‘brains’ count but capital & labour do not Most investors argue that such a sharp decline in prices and costs represents ‘good deflation’

as it encourages development of new products and services and the incremental demand

would more than compensate destruction of businesses (whether encyclopaedias or Yellow

Cabs). Whilst this Schumpeterian ‘creative destruction’ is the essence of all progress, most

investors and commentators tend to ignore the fact that transitions are hard and this

transition is likely to be far harder than most.

In many ways, we view the current period as effectively a transition into post-Capitalism (to

paraphrase the title of Paul Mason’s recent book1). The new economy that is emerging is one

of abundance (rather than scarcity) and it is increasingly based on ‘commons’ rather than

exclusive rights and is rooted in deeper networking of technologies and societies. Whilst there

is a range of books and articles that cover various technological issues, there are very few

publications that examine the extent of social and economic disruption that this transition is

likely to imply, as we progress into the world of declining return on both capital and

humans.2 The way we tend to conceptualize the world that has been slowly emerging over

the last two decades is that it is a world that disproportionately favours flexibility and brain

power but penalizes traditional capital investment and conventional labour inputs.

In other words, whatever is ‘soft and flexible’ is good, and in reverse, whatever is ‘hard and

inflexible’ is bad. Even traditional arguments regarding advantages of scale (such as large

and well-endowed countries) are unlikely to hold much water. In his book ‘Zero to One’, Peter

Thiel (PayPal fame) outlined a basic concept of ‘zero to one’ (essentially innovation and

cumulative brain power) vs ‘one to n’ (represents globalization and spread of existing

technologies). Thiel correctly highlighted that there were periods when considerable

innovation coincided with rapid globalization (such as second half of 19th and early 20th

centuries – here). On the other hand, the 1960s-70s was a period of technological innovation

but limited globalization, whilst the 1980s-90s saw limited innovation but very robust

globalization.

For the younger generation (brought up in the 1980s-2000s), globalization was supposed to

drive demand and efficiency whilst leading to convergence of different societies at a much

higher level of income.

As discussed in our prior reviews, the idea of convergence has always been suspect, but in

the 1990s it picked up momentum. The idea that was propagated by Gerschenkron in the

1960s (‘Backwardness in historical perspective’) was that in classical economics, countries

that have lower stock of technological, infrastructure and human capital should be able to

accelerate at faster rate by adopting already tried and tested products, technologies and

processes. Hence, poorer nations are supposed to grow faster than richer nations, until

convergence occurs. However, this has not been the case over the last fifty years, and indeed

it was also not true for individual decades either. If we examine log of GDP per capita in 1960

and compare to per capita growth rates over the subsequent 55 years, there is no evidence

that less developed countries have delivered faster growth rates, and indeed it was

developed rather than poorer nations that have become much more alike (here). In other

words, divergence rather than convergence was the dominant trend. However, in the

1990s, it briefly seemed that there might be a break. It was not to be.

We are now entering a new age. As we progress over the next decade, we maintain that it

would be an age of not only increasing deglobalization but also of massive technological

changes (refer What caught my eye? v.61 - ‘Lumpenproletariat’ & deglobalization 20 July

2016) and most importantly, changes in how humans relate to machinery and societies. In

other words, it is likely to be the world when almost all rewards would accrue to countries

and firms that capture ‘zero to one’, with limited benefits flowing to those that over the last

three decades thrived on globalization and propagation of existing technologies (economies

that are very good at ‘one to n’). This places the largest beneficiaries of past globalization in a

firing line (such as China and Asia-Pacific in general).

1 Paul Mason, “Post capitalism”, Farrar, Strauss and Giroux, 2016 2 Books by Martin Ford “Rise of Robots” and by David Warsh “Knowledge and Wealth of Nations” are some of the few exceptions

All transitions are

hard

In the future, ‘soft &

flexible’ is good,

whilst ‘hard and

inflexible’ is bad

Productivity is

increasingly driven

by ‘social capital’

and not by

conventional labour

inputs and capital


7 October 2016 7

The US is particularly well-positioned for this new world. Its corporates over the last three

decades have effectively outsourced the ‘hard and inflexible’ assets to other countries

(principally China and Mexico) and instead focused on softer areas. Hence, rapidly rising

corporate free cash flow that explains S&P’s strong performance. Whilst this does not

preclude an ongoing disintegration of the domestic labour markets and would continue to

drive further rise in income and wealth inequalities, at least the US is positioned in broadly

the right end of the spectrum.

The reverse applies to the greatest beneficiaries of the last three decades of globalization and

associated widening of supply and value chains. Does recent successful establishment of

robotic factories by Adidas and Nike spell the end of Vietnam? The answer is no, but it is

potentially the beginning of the end of the Vietnam story (at least as far as textile and

footwear industries are concerned). The new factories, whilst not contributing much to

German or the US manufacturing employment, are delivering marginal costs below Vietnam’s

highly labour-intensive equivalents. Similarly, GE is arguing that it might be able to ‘print’ the

entire engine by 2020. This could lead to significant erosion of supply and value chains in

countries like Taiwan or Japan. Whilst the above examples do not imply that countries like

Vietnam or Taiwan would not be able to find alternative industries, just differentiation in labour

costs per hour or specialization in certain components would not automatically guarantee flow

of investment and business. In other words, an accelerated shrinkage of supply and value

chains is gradually becoming one of the most defining of global themes.

These changing patterns of trade as well as redefinition of value of labour and capital inputs

(in a world where most new activities are not capital-intensive and where it is knowledge

rather than labour that determines success), also turn most investment themes on their head,

namely:

1. Demographics Themes are largely gone. In a world of surplus capital, declining

capital intensity and lower value of human input, demographics turns on its head.

TFP (or Total Factor Productivity) is the key to productivity and economic growth

rates and it is no longer as closely linked to combining labour and capital as it used

to be in 19th and 20th centuries. Hence, unless countries rapidly accumulate a deep

pool of ‘human knowledge’ and innovation, having an excess of young people is no

longer a recipe for success and growth. On the other hand, having a higher than

average old dependency ratios does not necessarily doom countries to stagnation

and decline. The key is productivity and what investors and governments are

witnessing is a structural shift away from conventional growth and demographics

dynamics. Hence, countries like India, Indonesia or Malaysia and regions like Africa

and the Middle East are facing a demographic curse, with a need to create around

40m jobs per annum. On the other hand, whilst countries like China, Korea, Japan or

Taiwan are facing various challenges, demographics is not one of them.

2. Urbanization as a theme is losing momentum. Lucas in his famous article on ‘The

Mechanics of Economic Development’3 asked why major cities do not fit into

conventional economic analysis. In other words, why are people clustering in

expensive cities like New York or London rather than spreading out more evenly?

The answer in 1960s-90s was that cities offered significant clustering impact of

facilitating proliferation and interconnection of ideas and new business practices and

hence, people and businesses were congregating in places where it was easier to

transact and secure capital. However, in the modern network-based economy, there

is less need to cluster, and capital is now aggressively seeking out opportunities

rather than being rationed. Hence, it is quite likely that the role of large urban centres

as productivity catalysts is likely to decline.

3 Robert Lucas, “On the mechanics of Economic Development”, Journal of Monetary Economics 22 (1988), pp3-42

‘Zero to one’ would

capture most of the

upside whilst...

...importance of

global supply and

value chains would

continue to erode

The transformation

is altering most of

the conventional

investment themes


7 October 2016 8

3. Divergence rather than convergence trends are strengthening. As discussed

above, current structural shifts are emphasizing divergence rather than convergence.

Hence, the core idea of emerging market consumption loses a great deal of its

relevance. In many ways, it was massive globalization and widening of supply and

value chains when combined with global financialization that created the basic

concept of EM universe. Growing deglobalization, increasing role of more intangible

factors (like knowledge) and technological shifts imply that EMs as an asset class are

impaired and there would be much deeper divergence than convergence.

We maintain that instead of looking into the ‘rear view mirror’ of what worked in 1980s-90s,

investors should focus on far more disruptive themes, which favour structural shifts and

constraints (refer discussion below).

However, how would the states and the governments that still dominate the decision-making

process react?

As discussed in the past, we believe that the growing emergence of extreme political and

social elements (as we described here, younger people now tend to lean to the extreme left

and older people to the extreme right) is simply a reflection of the above outlined structural

shifts that have been accelerating for the last several decades. People (aka citizens,

whether voting or not, makes very little difference) are asking for salvation and relief

and political systems are desperately trying to accommodate people’s insecurities. This

explains recent proliferation of referendums (i.e. passing the ‘buck’ back to the people). In line

with Dani Rodrik’s dilemma (i.e. it is impossible to combine democracy, national sovereignty

and global integration, at least not to the full extent), governments need to choose what to

sacrifice.

States would need

to decide whether

democracy, national

sovereignty or

integration would

need to be

sacrificed


7 October 2016 9

Disruption = aggressive public sector; China as a guiding light As one can easily witness in the EU today, Rodrik’s ‘impossible trilemma’ has considerable

on-the-ground consequences. It is this impossibility of combining democracy, national

sovereignty and deep economic integration that lies at the heart of Brexit and continuing

turbulence in countries like Greece.

Whilst EU is arguably the most extreme example, the same forces are broadly in play across

the rest of the world. Although globalization does benefit the entire world, its beneficiaries

never compensate the net losers (at least not within acceptable political and social time-

scales). Given that humanity remains divided on a tribal basis, this lack of compensation or

transfer of wealth (which does at least partially occur within tribes or what we now call

nations) undermines societies and political legitimacy.

The governments and people need to choose and we believe that the line of least

resistance would be a significant slowing of pace of globalization (de-globalization),

closure of borders, restrictions on capital flows, changes in welfare policies,

protection of local businesses and perhaps most importantly, far more aggressive

utilization of fiscal and monetary levers. We have described some of these issues in a

report here. Given that the private sector refuses to multiply aggregate demand, it is

increasingly perceived to be the responsibility of public sector to do so and hence growing

calls for proactive fiscal and monetary policies. IMF has been pushing for it, for at least the

last 12 months and increasingly there is a support for recombining of fiscal and monetary

policies from multitude of opinion makers (refer Adair Turner, Martin Wolf, Larry Summers

etc).

In other words, after spending more than five decades separating the two arms of public

policies, there is a growing support for a globally co-ordinated fiscal and monetary

expansion. Whilst some describe it as ‘helicopter’ money, we prefer to call it ‘nationalization

of credit’ as it is (in our view) more precise definition. The governments are likely to get

involved far deeper not just in controlling rates and shape of the yield curve but also, in direct

allocation of credit. As discussed in our prior reviews (here), we believe that the pendulum

has been shifting in favour of the state for at least ten years and would continue to do so for

decades to come, with investment and government support accelerating in four key areas:

1. Re-definition of welfare policies and support for consumption. Given that

humans are increasingly less relevant as the primary conduit of productivity and

that individuals who are likely to actually contribute to accumulation of knowledge

(and hence remain active productivity drivers) are likely to be relatively small in

numbers, welfare policies would need to reflect this polarization.

In other words, unlike 19th and 20th centuries, most people are unlikely to have

conventional jobs or professions (indeed in the US already ~40% of people are

employed in contingent jobs and ~20% are in what are described as

‘unconventional arrangements’). However, people will continue to represent a

base for consumption and multiplication of aggregate demand. Hence, the need

for basic income guarantees, which was recently put to a referendum in

Switzerland and is currently being trialled in Finland and discussed in Japan. We

maintain that redefinition of the nature of human inputs would inevitably lead over

the next decade to proliferation of minimum income guarantees as the means of

encouraging innovation (i.e. jobs for the sake of generating monthly income

become less relevant) and ensuring growth in consumption.

2. Investment in fixed-asset infrastructure. Although we do not believe that most

countries (DMs but also some of the EMs, like Malaysia or Thailand) actually

require much in terms of incremental infrastructure, fixed asset investment

represents the best ‘bang for the buck’ and hence it is highly likely that despite

the fact that the new world is not going to be highly capital or infrastructure

intensive, the Governments are highly likely to accelerate the pace of investment.

We believe that line

of least resistance

would be

deglobalization,

closure of borders

and aggressive use

of fiscal and

monetary policies

State is likely to be

active in support of

consumption, fixed

asset investment,

R&D/skilling and

rescue of financial

super structure,

paid...


7 October 2016 10

3. R&D and skilling. As discussed (refer In JFK’s footsteps - Mars, communism,

fascism or war 1 September 2016), we actually think that this area should the

main focus, ranging from resurrection of Bell Labs and massive rise in NASA

budgets to exploration of space and changing curriculum. However, from a

political perspective, these types of commitments tend to be too long-term in

terms of political and social pay-offs.

4. Rescue the entire financial superstructure. As discussed in our prior notes, we

believe that essentially the entire financial sector is bankrupt (at various stages

and various forms). Ultimately the Governments would need to underwrite

liabilities. This particularly applies to pension funds but also life companies, highly

leveraged investment instruments etc.

How would the Governments fund this increase in fiscal spending?

We believe that borrowing is a highly limited exercise and whilst investors recognize that we

inhabit a world of excess capital, rising debt continues to highlight such increasingly obsolete

concepts as debt carrying capacity. It is also quite likely that wealth redistribution would

become one of the mechanisms, but again it has its limitations. Merging fiscal and monetary

policies however has no limitations.

Whilst merging two arms of public policy creates an exceptionally powerful instrument, with

considerable side-effects, we believe that it is inevitable that ultimately this will be the route

that most countries would adopt. No one of course would call it ‘helicopter money’. Rather it

would be described in relatively wholesome terms as ‘private-public partnerships’ or

‘crowding-in private sector’ or ‘high public sector multipliers’. At the end of the day, it

essentially implies the same outcome. Public sector would spend without borrowing (thus

breaking the nexus between spending and debt) and private sector would be co-opted to do

things that left to itself it would never have accepted. In other words, there would be projects

that private sector would only do, if public sector fully underwrites risks or public sector would

force private by restricting other investment alternatives. In other words, we maintain that the

dividing line between fiscal, monetary and banking policies and practices are likely to be

blurred to a point that it would be hard to tell where one set of policies begins and another

ends. Similarly, we expect blurring of dividing lines between public and private sectors, as

public sector becomes the prime driver of demand multiplication.

Does it sound familiar? It should, as we essentially described contemporary China.

Whilst there are legislative and regulatory divisions and indeed there are frequent internal

‘turf’ battles, for all practical purposes, in China, there are no meaningful differences between

monetary and fiscal policies, whilst the banking sector is essentially an instrument of

monetary policy. Also, unlike developed (and some of the EMs), Chinese economy is driven

by regular pulses of government spending and most of the country’s debt is largely

internalized. We estimate that out of China’s overall debt of ~300% of GDP, close to 160%

resides in the corporate sector (including 120% of GDP in state-owned enterprises).

Also, unlike in the West, most economists in China are essentially ‘political economists’,

recognizing the state’s absolute dominance. There is very little discussion of private sector

cycles, with most attention focused on political and state/public sector objectives. Although

conventional Western economists continue to rely on a few surviving private sector signals,

there is an undoubted shift that is currently occurring in the West to re-learn the lessons of

political economy and economic history that comes natural to China’s economists. Gradually,

what we call ‘the new normal’ in the West very much starts to resemble what in China has

been always regarded as conventional analysis (i.e. what would the government do and

which areas would it stimulate? What yield curve does the government want to maintain?).

...mostly through

merger of fiscal and

monetary policies

In many ways, China

is already an

apogee of this

evolution and...


7 October 2016 11

Whilst we do not defend or endorse China’s business model, we do believe that over

the next five years, increasing number of other countries would start resembling

China, not because either people or the governments think that it is the right business model,

but because increasingly there are no other palatable alternatives. We essentially view public

sector hyperactivity as politics responding to a popular desire for salvation by gradually

building ‘bridges’ towards the ‘new world’. At some stage societies, economies and

technology would broadly line up. At that point, productivity growth rates would significantly

accelerate. However, this could be several decades away and in the meantime alternatives to

public sector could be either war or even more extreme societal moves towards communism,

fascism or feudalism.

What about China itself? The truly ironic twist is that whilst the rest of the world is looking

for ways to imitate what essentially is a state-driven Chinese model, China (having practiced

it for two decades) is attempting to extricate itself from its debt-fuelled investment-led growth.

Unfortunately, having embraced public sector activism, it is almost impossible to exit, as

private sector and its signals atrophy and have difficulty standing on their own feet (witness

the challenge the West experienced in the 1970s-early 80s in exiting its own period of state

dominance and resultant stagflation).

In our view, the key challenge facing China is how to reduce importance of supply and value

chains that are likely to become much less valuable and how to accumulate sufficient ‘social

and human’ capital. As discussed in our recent note (What caught my eye? v.56 - Capital –

Time for a vegetarian diet? 11 May 2016), we believe that the key for China over the next

several years is to alter where it invests. Instead of acting as project managers, the state

should act as a steward of national resources. This involves investing in ‘small buckets’ that

accumulate into oceans, rather than focusing on large projects. The investment flows also

needs to be re-directed into ‘softer areas’, rather than infrastructure or real estate.

We also maintain that China needs to significantly accelerate a move up the value chain and

foster much more robust accumulation of ‘social rather than physical capital’. As discussed

above, the next five to ten years are likely to witness an accelerated shift in value allocation

away from countries that were the largest beneficiaries of globalization and proliferation of

past technologies and far more towards ‘zero to one’. Whilst the state is becoming more

dominant in most countries, its position in China is uniquely formidable. Unless the system

changes, is it possible for China to significantly accelerate accumulation of social capital

whilst reducing the importance of global supply and value chains? It is not clear whether it is

possible; however, experience over the last three decades would suggest not to

underestimate China’s ability to adapt. One possible answer is to institute nation-wide

minimum income guarantee (fully paid by cutting the final tenuous umbilical cord that still

separates fiscal and monetary policies). This should not only help to re-balance the economy

but also accelerate transition towards higher value-added ‘knowledge-based’ industries and

sectors.

So is China a ‘shining city upon a hill’? The answer is yes and no. In the short-to-medium

term, it is very likely that most economies would (reluctantly) continue to embrace China’s

style of state control and importance of public sector in stimulation of aggregate demand.

However, longer-term, both China and the West would need to redefine what is meant by jobs

and how income and wealth inequalities (between and within countries) are going to be

balanced. The new policies are likely to include:

1. Future role of consumption support mechanisms (like minimum income guarantees);

2. Encouragement of ‘commons’ whilst resisting monopolistic tendencies of

conventional private sector;

3. Broad-based changes to current education and skilling systems; and

4. Changes in political and social systems (for example until 1950, graduates from

Oxbridge Universities in the UK had more than one vote).

...most economies

are attempting to

emulate China’s

business model, at

the time...

...when China is

attempting to

extricate itself

Longer-term, China

and the rest need to

redefine most

economic, social

and political

settings


7 October 2016 12

Investment – either ignore or embrace the governments. We prefer to ignore. How does one invest in this extended transition to whatever the brand new world brings?

We maintain that essentially investors are likely to continue residing in a non-mean

reversionary world, characterized by lack of conventional private sector business or capital

market cycles. Essentially, it is a world where public sector is likely to become increasingly

more dominant and unlike private sector, public sector has no business cycles and hence it

emits no useful macro signals. Hence, our consistent view over the last two years has been

that one should avoid making tactical macro calls, as there is simply not enough informational

value in the few remaining (and gradually dying) private sector signals, whilst public sector

tends to be erratic and does not respond in a conventional manner.

Thus, we maintain that in a world that increasingly becomes dominated by public sector, only

five investment styles are possible:

1. Non-mean reversionary investment based on traditional investment (rather

than trading) philosophy of buying into companies capable of maintaining high

ROEs, primarily through margins and without excessive leverage. Apart from

financials, we do not believe that this portfolio should differentiate between

various sectors. Also, defensiveness or lack of volatility should not be the

guiding criteria. This is the essence of ‘Quality Sustainable Growth’ portfolios

that we have run for 3.5 years in Asia-Pacific and for the last eight months

globally;

2. Invest in disruption, as some of the above outlined core themes are likely to

continue to strengthen over the next five to ten years. We describe this strategy

as ‘Thematic Winners’. However, it is critical to invest in the right themes. As

discussed above, we believe that most of the 20th century themes (such as

demographics or urbanization) have largely run their course and indeed starting

to turn. We believe in constraints and not opportunities, with the greatest

constrain being what we usually describe as ‘Declining Returns on Humans’.

This is the essence of our Global Thematics portfolio where we invest in several

categories (such as replacement and augmentation of humans; ‘opium of the

people’; ‘Social and geopolitical dislocation’, etc).

3. Localization. As discussed in our recent reviews, we believe that there would

be increasing returns to be made from some of the localized companies (i.e.

local products and subcontracting; large local labour force and significant

contributors to local treasury taxation revenues) that would be increasingly

fostered and supported. In other words, some of the monopolistic profits

currently derived by strong globally and regionally competitive companies would

be transferred to locally based and well-connected enterprises;

4. Fast following & Government inspired rotation. We prefer to steer away from

this strategy as it is driven by largely unpredictable changes in public sector

policies. Given that public sector does not have transparent and conventional

business cycles, investing in expectation of policy changes can be an extremely

hazardous and short-lived exercise. Experience of other non-mean reversionary

periods tends to suggest that public sector-inspired spikes can easily and

quickly reverse. A classic example over the last 12 months was a significant

rally in materials and infrastructure names. Whilst both were severely penalized

in late 2015, most investors would have derived a similar return by simply

investing in disruptive technology or quality cyclicals, without having to make

judgements regarding either timing or strength of changes in public policies;

5. Passive investment. The final strategy is to go purely passive. Any global

portfolio that manages several hundred stocks is already largely passive.

Indeed, this would remain one of the most successful investment strategies.

We continue to prefer strategies that largely ignore rather than embrace government

(with only some exceptions being better quality localization plays). Summarised below is

performance of our key investment strategies and our key model portfolio recommendations.

We maintain that

investors are

residing in a non-

mean reversionary

world

The choice: either

ignore or embrace

governments

We continue to

advocate ignoring

government and

focusing on ‘Quality

Sustainable growth’

and ‘Disruptive

Thematics’


7 October 2016 13

Our flagship Asia ex Japan ‘Quality/Sustainable Growth’ portfolio continues to do well

despite having limited turnover. The portfolio has delivered ~4% outperformance on YTD

basis (relative to its benchmark MSCI Asia ex Japan US$, TR basis), and over ~29%

outperformance since we started running this strategy (March 2013). Current portfolio

recommendations from our latest rebalancing (July-2016) are highlighted below.

Fig 9 Macquarie –Asia ex JP ‘Quality/Sustainable Growth’ portfolio performance relative to MXASJ (since inception March 2013 until Oct 2016)

Fig 10 Macquarie – Asia ex JP ‘Quality/Sustainable Growth’ model portfolio (July-2016 edition)

Source: Bloomberg, Macquarie Research, Oct 2016: Note – Equal weighted portfolio; Returns are dollar returns including dividends; Excludes transaction costs; Past performance is not a guarantee of future performance; Until close of 4-Oct- 2016

Source: Macquarie Research, October 2016. For details refer “Rights, Wrongs & Returns - 2H16 – Investment Twilight zone”, 15 July 2016

From a global perspective, we continue to recommend ‘Quality/Sustainable Growth’ and

‘Thematics’ as two key investment strategies.

Our model Global ‘Quality/Sustainable growth’ portfolio has managed to avoid

underperformance against benchmark (MSCI AC World, US$, TR basis) despite having very

limited exposure to commodities or areas which have seen significant gains during the current

phase of the rally. YTD we have outperformed by ~3%. Meanwhile our Global ‘Thematics’

investment strategy has delivered an outperformance of ~3%-4% since launch in June-

2016 despite having seen no rebalancing. Summarised on the subsequent pages are our

current ‘Global Quality/Sustainable Growth’ and ‘Global Thematic’ model portfolios.

Fig 11 Macquarie – Global ‘Quality/Sustainable Growth’ portfolio performance relative to MSCI AC World (since inception Feb-2016 until Oct 2016)

Fig 12 Macquarie – Global ‘Thematics’ portfolio performance relative to MSCI AC World (since inception Jun-2016 until Oct 2016)



95

100

105

110

115

120

125

130

135

Mar

-13

Jun

-13

Sep

-13

De

c-1

3

Mar

-14

Jun

-14

Sep

-14

De

c-1

4

Mar

-15

Jun

-15

Sep

-15

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

ASXJ "Quality and Stability" portfolio (rel to MSCI ASXJ, $ TR basis)

Code Company Name Reco. Analyst Name Country

700 HK Tencent O/P Wendy Huang HONG KONG

2330 TT TSMC O/P Patrick Liao TAIWAN

ST SP SingTel O/P Prem Jearajasingam SINGAPORE

ITC IN ITC O/P Amit Sinha INDIA

INFO IN Infosys Limited O/P Abhishek Bhandari INDIA

000333 CH Midea Group (A-Share) O/P Terence Chang CHINA

035420 KS NAVER O/P Soyun Shin SOUTH KOREA

090430 KS Amorepacific O/P Kwang Cho SOUTH KOREA

MSIL IN Maruti Suzuki India O/P Amit Mishra INDIA

288 HK WH Group Ltd. (HK) N/R Not Rated HONG KONG

1044 HK Hengan O/P Linda Huang HONG KONG

GCPL IN Godrej Consumer Products O/P Amit Sinha INDIA

EIM IN Eicher Motors Ltd. O/P Amit Mishra INDIA

669 HK Techtronic Industries N/R Not Rated HONG KONG

2313 HK Shenzhou International O/P Terence Chang HONG KONG

600066 CH Zhengzhou Yutong Bus (A) O/P Zhixuan Lin CHINA

1193 HK China Resources Gas O/P Candice Chen HONG KONG

1999 HK Man Wah O/P Timothy Lam HONG KONG

5347 TT Vanguard Neutral Patrick Liao TAIWAN

HTHT US China Lodging Group O/P Timothy Lam CHINA

95

96

97

98

99

100

101

102

04

-Fe

b-1

6

18

-Fe

b-1

6

03

-Mar

-16

17

-Mar

-16

31

-Mar

-16

14

-Ap

r-1

6

28

-Ap

r-1

6

12

-May

-16

26

-May

-16

09

-Ju

n-1

6

23

-Ju

n-1

6

07

-Ju

l-1

6

21

-Ju

l-1

6

04

-Au

g-1

6

18

-Au

g-1

6

01

-Se

p-1

6

15

-Se

p-1

6

29

-Se

p-1

6

"Global Quality and Stability" portfolio (rel to MSCI AC World, $ TR basis)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

7-J

un

-16

14

-Ju

n-1

6

21

-Ju

n-1

6

28

-Ju

n-1

6

5-J

ul-

16

12

-Ju

l-1

6

19

-Ju

l-1

6

26

-Ju

l-1

6

2-A

ug-

16

9-A

ug-

16

16

-Au

g-1

6

23

-Au

g-1

6

30

-Au

g-1

6

6-S

ep

-16

13

-Se

p-1

6

20

-Se

p-1

6

27

-Se

p-1

6

4-O

ct-1

6

Excess returns (RHS) "Global Thematics" returns MXWD $

Our key portfolios

continue to

outperform, despite

low stock rotation

or...

...chasing state-

inspired ‘sugar

rush’


7 October 2016 14

Fig 13 Macquarie – Global ‘Quality/Sustainable Growth’ portfolio (July 2016 edition)

Source: Macquarie Research, October 2016; For details refer “Rights, Wrongs & Returns - 2H16 – Investment Twilight zone”, 15 July 2016

Fig 14 Macquarie – Global ‘Thematics’ portfolio (June 2016 edition)

Source: Macquarie Research, October 2016. For details, refer “What caught my eye? v.59 - In praise of Thematics” 7 June 2016

Ticker Company Name Country Ticker Company Name Country

GOOGL US Alphabet UNITED STATES INFO IN Infosys Limited INDIA

MSFT US Microsoft UNITED STATES CON GR Continental AG GERMANY

JNJ US Johnson & Johnson UNITED STATES 4503 JP Astellas Pharma Inc. JAPAN

FB US Facebook UNITED STATES ADS GR adidas GERMANY

700 HK Tencent HONG KONG 4452 JP Kao Corp. JAPAN

ORCL US Oracle UNITED STATES WPP LN WPP UNITED KINGDOM

DIS US The Walt Disney Company UNITED STATES NVDA US NVIDIA UNITED STATES

V US Visa Inc. Class A UNITED STATES 6981 JP Murata Mfg JAPAN

2330 TT TSMC TAIWAN EA US Electronic Arts UNITED STATES

AMGN US Amgen Inc. UNITED STATES ILMN US Illumina, Inc. UNITED STATES

NOVOB DC Novo Nordisk A/S Class B DENMARK MSIL IN Maruti Suzuki India INDIA

OR FP L'Oréal FRANCE HO FP Thales SA FRANCE

MA US MasterCard Class A UNITED STATES COLOB DC Coloplast A/S Class B DENMARK

BAYN GR Bayer AG GERMANY CAP FP Cap Gemini SA FRANCE

MC FP LVMH FRANCE 7741 JP HOYA JAPAN

NKE US NIKE UNITED STATES 8035 JP Tokyo Electron JAPAN

ST SP SingTel SINGAPORE IPG US Interpublic Group UNITED STATES

ADP US Automatic Data Processing UNITED STATES EIM IN Eicher Motors Ltd. INDIA

AIR FP Airbus Group SE NETHERLANDS 669 HK Techtronic Industries Co., Ltd. HONG KONG

FDX US FedEx UNITED STATES 2313 HK Shenzhou International HONG KONG

Ticker Name Country Ticker Name Country

Theme 1: "Replacing Humans": Robots, Industrial Automation & AI Theme 4: "Bullets and Prisons": Defense, Security, Prisons/Correction Centres

ABBN VX ABB Ltd. Switzerland 047810 KS Korea Aerospace Industries, Ltd. South Korea

300024 CH SIASUN Robot & Automation A China 002415 CH Hangzhou Hikvision Digital A China

6506 JP Yaskawa Electric Corp. Japan LMT US Lockheed Martin Corporation United States

ISRG US Intuitive Surgical, Inc. United States RTN US Raytheon Company United States

SIE GR Siemens AG Germany NOC US Northrop Grumman Corporation United States

HON US Honeywell International United States HO FP Thales SA France

6503 JP Mitsubishi Electric Corp. Japan ESLT IT Elbit Systems Ltd Israel

6645 JP OMRON Corporation Japan CXW US Corrections Corporation of America United States

300124 CH Shenzhen Inovance Tech. A China GEO US GEO Group Inc United States

1590 TT AirTAC Taiwan Theme 5: "Education & Skilling"

NVDA US NVIDIA Corporation United States PSON LN Pearson PLC United Kingdom

MLNX US Mellanox Technologies, Ltd. Israel JW/A US John Wiley & Sons, Inc. Class A United States

Theme 2: "Augmenting Humans": Genome/Biotechnology/DNA sequencing EDU US New Oriental Education & Tech. Sp ADR China

AMGN US Amgen Inc. United States XRS US TAL Education Unspons. ADR Class A China

BIIB US Biogen Inc. United States NORD US Nord Anglia Education, Inc. Hong Kong

ABBV US AbbVie, Inc. United States WKL NA Wolters Kluwer NV Netherlands

ILMN US Illumina, Inc. United States Theme 6: "Demographics": Funeral Parlours and Psychiatric Centres

Theme 3: "Opium of the people": Games, Casinos/Virtual Reality 1448 HK Fu Shou Yuan International Group Ltd. China

700 HK Tencent Holdings Ltd. China SCI US Service Corporation International United States

ATVI US Activision Blizzard, Inc. United States UHS US Universal Health Services, Inc. Class B United States

EA US Electronic Arts Inc. United States ACHC US Acadia Healthcare Company, Inc. United States

NTES US NetEase, Inc. Sponsored ADR China Theme 7: "Disruptors & Facilitators"

7974 JP Nintendo Co., Ltd. Japan AMZN US Amazon.com, Inc. United States

LVS US Las Vegas Sands Corp. United States TSLA US Tesla Motors, Inc. United States

1928 HK Sands China Ltd. Macau FB US Facebook, Inc. Class A United States

002241 CH GoerTek Inc. Class A China CRM US salesforce.com, inc. United States

NFLX US Netflix, Inc. United States

GOOGL US Alphabet Inc. Class A United States


7 October 2016 15

Appendices

Fig 15 Index performance, (Local currency, unless stated otherwise), %

Note : Priced as of close of 4 Oct 2016 Source: MSCI, Thomson, Macquarie Research, Oct 2016

Fig 16 Index performance by MSCI country and sector (local currency) – Last three months, %


MSCI Indices - 1W - 1M - 3M - 1Y - 3Y - 5Y YTD Index

MSCI AC Asia ex JP (LC) 0.5 2.2 8.4 10.9 7.4 39.2 9.3 681

ASXJ Consumer Discretionary 0.7 3.2 10.7 7.6 -16.4 7.5 6.5 451

ASXJ Consumer Staples 0.3 0.7 -1.8 5.5 13.3 44.9 6.6 508

ASXJ Energy 3.0 4.7 5.5 19.7 -19.5 -13.5 16.5 565

ASXJ Financials 0.3 1.2 9.8 8.1 6.8 48.4 5.3 305

ASXJ Health Care -0.9 -0.0 2.0 0.1 41.8 110.8 -1.8 964

ASXJ Industrials 0.6 -0.5 5.2 -5.8 -7.7 12.3 -1.7 155

ASXJ Information Technology 0.7 4.5 13.1 26.3 35.2 93.8 20.9 383

ASXJ Materials 1.2 0.9 5.8 15.8 -3.0 2.0 12.7 311

ASXJ Utilities -1.2 -0.1 2.6 3.6 11.5 46.7 4.7 230

ASXJ Telecom Svcs 0.9 1.2 1.9 3.8 3.7 23.0 7.2 145

MSCI AC ASIA EX JP U$ 0.3 2.5 9.5 13.8 2.5 33.7 11.7 558

MSCI CHINA U$ -0.1 2.8 14.3 8.5 3.5 44.0 7.9 64

MSCI HONG KONG U$ 0.6 3.1 11.1 13.7 10.8 68.3 10.5 10,438

MSCI INDIA U$ 1.1 0.7 6.2 6.5 28.8 28.4 8.1 497

MSCI INDONESIA U$ 0.1 5.4 12.7 56.2 15.3 12.7 28.1 837

MSCI KOREA U$ -0.9 2.0 9.0 19.3 -4.7 27.6 15.0 409

MSCI MALAYSIA (EM) U$ -0.2 -1.4 -2.3 10.5 -29.4 -8.9 3.4 352

MSCI PHILIPPINES U$ 2.4 -4.0 -4.8 7.9 11.8 90.7 7.9 573

MSCI SINGAPORE U$ 0.2 2.0 -2.9 6.3 -19.9 4.4 1.6 3,305

MSCI TAIWAN U$ 1.6 5.0 9.5 18.8 10.5 35.9 19.2 317

MSCI THAILAND U$ 1.6 -0.1 6.9 20.6 -6.0 41.6 27.9 377

MSCI China -0.1 2.8 14.3 8.6 3.5 43.5 7.9 64

MSCI Hong Kong 0.6 3.1 11.1 13.8 10.8 67.7 10.6 14,579

MSCI India 1.2 0.2 5.0 8.1 38.9 72.9 8.7 1,072

MSCI Indonesia 0.3 3.3 11.4 38.5 29.9 64.3 20.7 6,582

MSCI Korea 0.1 1.1 5.2 11.9 -1.3 18.4 8.7 572

MSCI Malaysia -0.1 -0.4 0.9 3.3 -8.4 17.6 -0.6 584

MSCI Philippines 2.5 -0.6 -1.9 11.4 25.3 108.7 10.7 1,330

MSCI Singapore 0.8 2.7 -1.1 1.7 -12.1 8.7 -1.8 1,471

MSCI Taiwan 1.3 3.8 6.6 13.2 17.9 38.8 13.8 348

MSCI Thailand 1.9 0.2 5.8 14.3 4.1 57.7 23.3 524

MSCI EMG 0.6 1.0 7.2 10.2 5.5 31.4 10.5 49,176

MSCI World (Dev) 0.3 -0.8 3.8 6.8 19.0 72.8 2.2 1,306

MSCI AC World (All) 0.3 -0.6 4.2 7.2 17.5 67.4 3.1 483

MSCI Japan -0.8 -0.9 6.3 -8.2 12.0 78.6 -14.2 804

MSCI USA -0.4 -1.3 2.5 9.9 26.5 91.2 5.2 2,051

MSCI AC Asiapac x JP ($) 0.5 2.7 8.6 14.6 -2.3 28.7 11.0 456

MSCI AC WORLD U$ -0.1 -0.7 4.0 7.6 8.7 53.4 4.5 417

MSCI EM U$ 0.5 1.8 8.6 13.9 -9.2 10.2 15.3 916

MSCI WORLD U$ (Dev) -0.1 -1.0 3.4 6.9 11.0 59.9 3.3 1,718

MSCI EM ASIA U$ 0.3 2.5 10.0 14.2 3.0 31.4 12.5 454

MSCI WORLD EX JP ($) 0.2 -1.1 3.2 6.9 11.5 62.9 3.6 1,729

MSCI EUROPE U$ 1.6 -1.1 5.0 -1.3 -9.4 30.4 -2.4 1,486

MSCI EMU U$ 1.7 -1.1 7.3 0.3 -8.4 34.7 -2.3 168

MSCI AC Asia ex JP

AC

Asia

ex JP

China HK India Indo Korea Mal Phils Sing TW Thai EMG World

(Dev) Japan

AC

World

MSCI Country Index 8.4 14.3 11.1 5.0 11.4 5.2 0.9 -1.9 -1.1 6.6 5.8 7.2 3.8 6.3 4.2

Cons. Disc 10.7 17.6 17.2 14.0 8.1 1.4 1.6 3.0 3.3 9.1 -0.9 7.6 5.1 10.6 5.3

Staples -1.8 1.3 4.5 -1.8 8.3 -10.0 2.4 -10.0 -2.9 -3.1 17.0 0.8 -1.3 -1.2 -1.2

Energy 5.5 0.0 NA 12.2 32.4 5.9 5.4 0.0 0.0 13.1 7.9 5.1 0.6 7.6 1.1

Financials 9.8 13.0 13.0 11.6 15.3 9.7 -0.7 1.3 -0.3 6.8 5.9 9.2 7.0 6.7 7.3

Banks 9.3 13.9 8.0 11.3 17.1 13.0 -0.9 0.8 -0.9 1.8 6.7 10.3 9.9 13.9 10.0

Real Estate 10.0 10.7 13.8 NA NA NA 9.1 1.9 2.5 -6.3 0.0 3.4 -2.6 -4.6 -2.1

Health Care 2.0 9.7 NA 3.2 14.9 -8.9 -1.1 NA 0.0 -13.3 -6.8 0.4 -0.9 -2.7 -0.9

Industrials 5.2 2.3 12.3 6.5 0.8 9.4 0.8 -1.4 -4.0 1.2 0.3 4.3 5.2 6.1 5.2

IT 13.1 22.9 15.1 -7.6 NA 10.8 0.0 0.0 0.0 8.8 22.3 12.9 12.1 11.9 12.3

Materials 5.8 6.1 0.0 18.5 12.1 1.5 2.9 0.0 NA 2.7 6.1 5.2 7.0 14.8 6.7

Utilities 2.6 7.2 2.2 -0.3 23.9 -6.3 2.7 3.6 NA NA -2.3 1.3 -6.6 -0.9 -5.9

Telecom Services 1.9 7.2 -4.3 -10.3 6.6 5.3 0.1 -18.6 -3.3 -4.3 1.4 0.7 -4.2 -1.0 -3.4


7 October 2016 16

Fig 17 Valuations – Asia ex JP and key comps


Fig 18 MQ-Asia ex JP – Country Allocation tilts (%)

Source: Macquarie Research, Oct 2016

Avg since 2010

MSCI Indices PER P/B EPS gr ROE DY PER P/B ROE DY PER P/B

MSCI AC Asia ex JP 13.0 1.4 9.5 10.5% 2.6% 12.0 1.6 13.0% 2.9% 11.5 1.5

ASXJ Consumer Discretionary 13.5 1.5 12.4 11.4% 2.1% 11.2 1.8 15.6% 2.4% 11.2 1.8

ASXJ Consumer Staples 21.5 3.0 13.6 13.8% 2.0% 16.3 2.7 15.3% 2.4% 19.0 2.7

ASXJ Energy 12.8 0.9 26.9 7.3% 3.0% 10.0 1.6 14.7% 3.2% 10.4 1.3

ASXJ Financials 9.8 1.0 3.6 10.5% 3.4% 11.9 1.4 11.4% 3.3% 10.2 1.2

ASXJ Health Care 25.0 3.6 19.0 14.3% 0.8% 18.7 3.2 15.8% 1.1% 21.6 3.3

ASXJ Industrials 13.1 1.1 9.4 8.4% 2.5% 13.1 1.4 10.7% 2.5% 12.6 1.3

ASXJ Information Technology 15.9 2.2 15.9 14.1% 1.9% 13.2 2.0 15.7% 2.2% 12.2 1.9

ASXJ Materials 12.8 1.0 17.0 8.1% 2.9% 10.4 1.4 12.9% 3.2% 11.8 1.3

ASXJ Utilities 10.9 1.2 -1.4 11.4% 3.4% 12.5 1.4 10.8% 3.3% 13.1 1.4

ASXJ Telecommunication Services 16.1 1.9 6.5 11.6% 3.6% 13.1 2.0 15.0% 4.0% 13.8 1.9

MSCI China 12.3 1.4 11.6 11.7% 2.3% 11.5 1.8 14.9% 3.0% 9.9 1.5

MSCI Hong Kong 16.2 1.1 5.1 6.9% 3.2% 15.4 1.4 8.7% 3.3% 14.8 1.3

MSCI India 17.8 2.7 17.0 15.4% 1.6% 14.5 2.6 16.6% 1.6% 15.2 2.4

MSCI Indonesia 16.4 2.7 13.2 16.3% 2.4% 11.4 2.8 21.8% 3.2% 13.8 2.9

MSCI Korea 10.1 0.9 9.0 9.2% 1.9% 9.3 1.2 12.4% 1.7% 9.3 1.1

MSCI Malaysia 15.9 1.6 4.0 9.8% 3.1% 14.4 1.9 12.9% 3.6% 14.8 1.9

MSCI Philippines 18.6 2.4 8.4 13.0% 1.7% 15.0 2.2 14.6% 2.6% 16.9 2.6

MSCI Singapore 12.5 1.1 1.9 8.4% 4.2% 14.0 1.5 10.9% 3.7% 13.2 1.4

MSCI Taiwan 13.6 1.6 7.3 11.8% 4.0% 14.0 1.7 13.1% 3.9% 13.2 1.7

MSCI Thailand 14.1 1.8 12.0 12.7% 3.1% 11.0 1.8 16.2% 3.9% 11.9 1.9

MSCI EMG 12.5 1.4 11.8 11.3% 2.7% 10.7 1.6 14.3% 3.3% 10.7 1.4

MSCI World (Dev) 16.1 2.0 10.4 12.3% 2.7% 14.6 1.9 13.6% 2.7% 13.7 1.8

World(Dev) Consumer Discretionary 15.7 2.5 10.1 15.8% 2.2% 16.5 2.1 13.6% 2.0% 14.8 2.2

World(Dev) Consumer Staples 20.3 4.0 9.1 19.7% 2.7% 16.6 3.2 19.2% 2.8% 16.6 3.2

World(Dev) Energy 26.0 1.5 71.4 5.9% 3.8% 13.9 1.8 14.2% 2.8% 15.0 1.5

World(Dev) Financials 11.4 1.0 6.2 8.4% 3.6% 11.9 1.3 10.7% 3.4% 11.5 1.0

World(Dev) Health Care 16.0 3.3 9.0 20.6% 2.1% 15.9 2.9 19.7% 2.3% 14.4 2.8

World(Dev) Industrials 16.2 2.4 12.0 15.0% 2.6% 15.2 2.1 14.5% 2.4% 14.1 2.1

World(Dev) Information Technology 17.3 3.4 11.0 19.9% 1.6% 19.0 2.9 18.2% 1.2% 14.3 2.8

World(Dev) Materials 17.1 1.8 14.0 10.3% 2.4% 14.0 1.8 13.6% 2.4% 13.4 1.7

World(Dev) Utilities 16.5 1.6 0.4 9.6% 3.8% 14.0 1.6 10.7% 4.2% 14.5 1.4

World(Dev) Telecommunication Services 14.6 2.1 8.0 14.2% 4.3% 19.7 1.8 12.7% 4.6% 13.5 1.8

MSCI AC World (All) 15.6 1.9 10.6 12.2% 2.7% 14.2 1.9 13.6% 2.9% 13.3 1.7

MSCI Japan 13.5 1.1 10.0 8.1% 2.4% 16.7 1.3 8.5% 1.7% 13.6 1.1

MSCI USA 17.2 2.6 10.8 15.3% 2.2% 15.2 2.3 15.5% 2.1% 14.4 2.2

MSCI Australia 15.8 1.7 9.0 11.0% 4.7% 14.0 2.0 14.3% 4.7% 13.5 1.8

12 Month forward estimates LT Average (12M forward ests)

-3 -2 -1 0 1 2 3

India

Philippines

Taiwan

China

Korea

Malaysia

Singapore

Hong Kong

Thailand

Indonesia


7 October 2016 17

Recent Asia Equity Strategy Research

MicroStrategy - Buy & sell side: Most loved & hated stocks 26 September 2016 Markets & US elections - Donald or Hillary, does it matter? 13 September 2016 What caught my eye? v.64 - Could strong DXY be good for EMs? 9 September 2016 In JFK’s footsteps - Mars, communism, fascism or war 1 September 2016 What caught my eye? v.63 - Deconstructing SPX – mind the GAAP 25 August 2016 Twilight - where to now? - ‘Damned Volcker’ and equities 16 August 2016 EM Equities ‘Goldilocks’ - It is all about US10Y & DXY 12 August 2016 What caught my eye? v.62 - Thailand & coups – any benefit? 11 August 2016 Policy cross-roads - Is it the end of monetary activism? 1 August 2016 What caught my eye? v.61 - ‘Lumpenproletariat’ & deglobalization 20 July 2016 Rights, Wrongs & Returns - 2H16 – Investment Twilight zone 15 July 2016 Investment twilight - Between ignorance & confusion 12 July 2016 Ready for Battle - Macquarie earnings survivors’ guide 6 July 2016 MicroStrategy - Beyond Brexit, back to Asian fundamentals; where to from here? 29 June 2016 Brexit et al - It is all about 2nd derivatives & CBs 24 June 2016 What caught my eye? v.60 - Parallel lives: Japan vs. China 23 June 2016 What caught my eye? v.59 - In praise of Thematics 7 June 2016 What caught my eye? v.58 - Divergence, convergence & confusion 24 May 2016 What caught my eye? v.57 - Portfolios: The case of less is more 17 May 2016 What caught my eye? v.56 - Capital – Time for a vegetarian diet? 11 May 2016 What caught my eye? v.55 - Why are we staying in China & India? 29 April 2016 Ready for Battle - Macquarie earnings survivors’ guide 21 April 2016 Rights, Wrongs & Returns - Year of Living dangerously – sequel 13 April 2016 Central Banks & Markets - Mutually assured destruction 31 March 2016 Global Travel Notes - The blind leading the blind 29 March 2016 MicroStrategy - Earnings season – A letdown so far but there is a silver lining 22 March 2016 What caught my eye? v.54 - Negative rates and the war on savers 2 March 2016 What caught my eye? v.53 - Philippines shelter; CBs calling E.T 23 February 2016 Is it a policy dead-end? - Consistency in an inconsistent world 11 February 2016 What caught my eye? v.52 - Launching global portfolios 4 February 2016 Central Banks - Why insistence on failed policies? 1 February 2016 China’s hard landing - Has it already happened? 27 January 2016 What caught my eye? v.51 - Bulls, Bears and low rates 22 January 2016 What caught my eye? v.50 - The Fed and the need for redemption 11 January 2016 MicroStrategy – Growth it is - Five reasons we prefer Growth over Value 8 January 2016 China choices – narrowing - Between a rock and a hard place 7 January 2016 What caught my eye? v.49 - China’s savings dilemma 4 January 2016 Fed hikes. What now? - Implications for EM equities 17 December 2015 20 YEARS IN ASIA, 14 December 2015 Is it Bear Stearns moment? - Year of living dangerously, part II 14 December 2015 Rights, Wrongs & Returns - 2016 - Year of living dangerously 25 November 2015 Policy cross-currents - What would unhinge PBoC? 12 November 2015 Bihar dreaming - On impossibility of reforms 9 November 2015 What caught my eye? v.48- EMs – downside to the upside, 3 November 2015 What caught my eye? v.47- The more they do; the worse it gets, 27 October 2015 What caught my eye? v.46-Equities – irrational exuberance?, 8 October 2015 Time for a policy U-turn? - Back to the future: British Leyland, 18 September 2015 What caught my eye? v.45 - Today is more insidious than 1997, 16 September 2015 Old Friend Deflation is Back - From traders to shareholders, 25 August 2015 EM vs DM Equities - What would the average opinion say?, 20 August 2015 Deflators of the world unite - Impact on the US & Global PPIs, 17 August 2015 China’s dilemma - Between a rock and a hard place, 13 August 2015 Return of deflationary vortex - Commodities – canary in a coalmine?, 10 August 2015 What caught my eye? v.44 - Barbarians at the gate, 5 August 2015 China’s policy response - How different is it to G4 economies?, 20 July 2015 Rights, Wrongs & Returns - 2H–Falling knives & deflating bubbles, 13 July 2015 Are dominos finally falling? - Greece, Puerto Rico, China, 6 July 2015 What caught my eye? v.43 - Why consumer & business reticence?, 29 June 2015 China drama & Greek farce - Are CBs at the end of the road?, 29 June 2015 What caught my eye? v.42 - Resisting China; Asia ex earnings, 17 June 2015 Trade & Cyclicality - Stagnation in both = lower yields, 28 May 2015 What caught my eye? v.41 - China & Global Manufacturing, 27 May 2015 What caught my eye? v.40 - CBs vs deflation: will liquidity win?, 8 May 2015 What caught my eye? v.39 - China & Indonesia: Binary outcomes, 29 April 2015 What caught my eye? v.38 - When size does not matter, 13 April 2015


7 October 2016 18

Rights, Wrongs & Returns - 2Q-3Q’15 - The Hall of Mirrors, 27 March 2015 Global Liquidity Watch - Return of Greenspan’s conundrum?, 10 March 2015 What caught my eye? v.37 - India hope is still intact; travel notes, 5 March 2015 Chasing dividends - No mean reversion = desire for yield, 13 Feb 2015 What caught my eye? v.36 - Secular stagnation & four horsemen, 6 Feb 2015 Global liquidity watch - Liquidity tight but should improve, 27 Jan 2015 What caught my eye? v.35 - Focus on Thailand; CBs’ effectiveness, 26 Jan 2015 What caught my eye? v.34 - Trade & Flow watch; A vs H shares, 8 Jan 2015 Is deflation almost here? - What do DXY & bonds tell us, 6 Jan 2015 Global contagion risks - Commodities: canary in a coal mine?, 17 Dec 2014 China A retail exuberance - Damned if you do and damned if you don’t, 9 Dec 2014 Global Liquidity Watch - Eroded in 3Q’14 & Oct/Nov, 8 Dec 2014 Rights, Wrongs & Returns - 2015 preview: the “known unknowns”, 2 Dec 2014 How exposed is Korea? - Yen “doomsday machine”, 17 November 2014 What caught my eye? v. 33 - Currency wars & their discontents, 13 November 2014 What caught my eye? v.32 - On social upheavals, schools & robots, 30 October 2014 What caught my eye? v.31 - Is China in a liquidity trap? EM risks, 16 October 2014 What caught my eye? v.30 - EM vulnerabilities; U/W Indonesia, 9 October 2014 What caught my eye? v.29 - China’s city vs global city, 18 September 2014 What caught my eye? v.28 - Unstoppable China; EM equity rally, 9 September 2014 Global Liquidity - Most measures are looking better, 21 August 2014 ASEAN at the crossroads - Complex choices; uncertain outcomes, 18 August 2014 Phils – Fading optimism - ST concerns overshadow LT story, 31 July 2014 What caught my eye? v.27 - Importance of Trust; China’s rerating, 29 July 2014 Trade – Waiting for Godot - Small pick-up but no robust cyclicality, 18 July 2014 Rights, Wrongs & Returns - Higher rates or perhaps no rates, 15 July 2014 What caught my eye? v.26 - Oil, geopolitics & family formation, 3 July 2014 What caught my eye? v.25 - Value - many ways to skin a cat, 23 June 2014 What caught my eye? v.24 - Financial stability & catch 22, 13 June 2014 What caught my eye? v.23 - Reforms: who will & who will not, 30 May 2014 What caught my eye? v.22 - Upgrades and stagflations, 21 May 2014 Coups & Martial laws - Not necessarily a bad choice, 20 May 2014 What caught my eye? v.21 - China tourism; Portfolio update, 12 May 2014 What does FIC market tell equity investors? - All quiet on the Western front, 9 May 2014 What caught my eye? v.20 - Investments & geopolitical risks, 29 April 2014 What caught my eye? v.19 - Liquidity in its various forms, 16 April 2014 Rights, Wrongs & Returns - Policy errors, cyclicality & EM volatility, 28 March 2014 FOMC – Impact on EMs - Higher US$, rates and lower demand, 20 March 2014 Difficult case of Indonesia - Euphoria vs. terms of trade & liquidity, 17 March 2014 What caught my eye? v.18 - Is China unravelling? Not Yet, 11 March 2014 “Each unhappy family is unhappy in its own way” - Ukraine, Thailand, Argentina, et al, 3 March 2014 DM vs. EM push & pull - Beware what you wish for, 26 February 2014 Bond Yields & Equities - The question of foreign demand, 24 February 2014 What caught my eye? v.17 - Is the Philippines for real?, 24 February 2014 What caught my eye? v.16 - Third industrial revolution & its impact, 12 February 2014 What caught my eye? v.15 - Investment Cycles & Funds Flows, 17 January 2014 Liquidity trap vs. Stagflation - China vs India – tough choice, 15 January 2014 What caught my eye? v.14 - Would Indian corporates invest?, 6 January 2014 Tapering is on, so is the put - What is likely to happen to volatilities?, 19 December 2013 Investment Outlook – 2014 - “Out with the old and in with the new” Is it 1998 or 1999 – Buy all or Sell all?, 11 December 2013 What caught my eye? v.13 - China's savings conundrum & Plenum, 25 November 2013 What caught my eye? V.12- Hardware vs software; China's "divide & conquer” reform agenda?, 6 November 2013 What caught my eye? v.11 - Leading indicators and “blind alleys”, 28 October 2013 What caught my eye? v.10 - Corporate leverage – how much of a problem?, 3 October 2013 Asia Strategy - When you rely on asset bubbles, what else do you do?, 19 September 2013 What caught my eye? v.9 - Rmb: How exposed is China?, 18 September 2013 What caught my eye? v.8 - In and out of “shadows”, 6 September 2013 What caught my eye? v.7 - If something cannot go on forever, it will stop, 22 August 2013 ASEAN 4 – risks & returns - Kaleidoscope of themes, 16 August 2013 What caught my eye? v.6 - China industrial sector – the Good, the Bad and the Ugly, 31 July 2013 Reviewing Tactical Portfolio - Tough choices: damned if you do and damned if you don't in a slowing world, 10 July 2013 What caught my eye? v.5 - Liquidity – receding tide, 5 July 2013


7 October 2016 19

What caught my eye? v.4 - Central Bank’s “chicken run”, 27 June 2013 What caught my eye? v.3 - QEs to eternity whether successful or not, 12 June 2013 What caught my eye? v.2 - Korea - is China or Japan a greater threat?, 29 May 2013 What caught my eye? - Inflation falling everywhere, 22 May 2013 Rights, Wrongs & Returns - Bears and the Investment Clock, 24 April 2013 DXY rises and Yen falls - The pincer movement for EM equities, 8 April 2013 APAC – Competitive Edge - Separating winners from losers, 21 March 2013 Walk on the wild side - Macro threats - what, if and when, 4 March 2013


7 October 2016 20

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2016

AU/NZ Asia RSA USA CA EUR Outperform 45.17% 56.00% 36.36% 43.16% 63.39% 45.91% (for global coverage by Macquarie, 6.27% of stocks followed are investment banking clients)

Neutral 36.21% 28.59% 40.26% 50.38% 29.46% 36.96% (for global coverage by Macquarie, 6.33% of stocks followed are investment banking clients)

Underperform 18.62% 15.41% 23.38% 6.46% 7.14% 17.12% (for global coverage by Macquarie, 5.38% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited and Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FCA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions which are contrary to the opinions expressed in this research. Macquarie Research produces a variety of research products including, but not limited to, fundamental analysis, macro-economic analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated. Country-specific disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organisation of the Australian Securities Exchange. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and sent to US persons. Any US person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. The Research Distribution Policy of Macquarie Capital Markets Canada Ltd is to allow all clients that are entitled to have equal access to our research. United Kingdom: In the United Kingdom, research is issued and


7 October 2016 21

distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 193905). Germany: In Germany, this research is issued and/or distributed by Macquarie Capital (Europe) Limited, Niederlassung Deutschland, which is authorised and regulated by the UK Financial Conduct Authority (No. 193905). and in Germany by BaFin. France: In France, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (No. 193905). Hong Kong & Mainland China: In Hong Kong, research is issued and distributed by Macquarie Capital Limited, which is licensed and regulated by the Securities and Futures Commission. In Mainland China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing and distributing research. Only non-A share research is distributed into Mainland China by Macquarie Capital Limited. Japan: In Japan, research is Issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the Tokyo Stock Exchange, Inc. and Osaka Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member of Japan Securities Dealers Association). India: In India, research is issued and distributed by Macquarie Capital Securities (India) Pvt. Ltd. (CIN: U65920MH1995PTC090696), 92, Level 9, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Research Analyst having registration no. INH000000545. Malaysia: In Malaysia, research is issued and distributed by Macquarie Capital Securities (Malaysia) Sdn. Bhd. (Company registration number: 463469-W) which is a Participating Organisation of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission. Taiwan: In Taiwan, research is issued and distributed by Macquarie Capital Limited, Taiwan Securities Branch, which is licensed and regulated by the Financial Supervisory Commission. No portion of the report may be reproduced or quoted by the press or any other person without authorisation from Macquarie. Nothing in this research shall be construed as a solicitation to buy or sell any security or product. Research Associate(s) in this report who are registered as Clerks only assist in the preparation of research and are not engaged in writing the research. Thailand: In Thailand, research is produced, issued and distributed by Macquarie Securities (Thailand) Ltd. Macquarie Securities (Thailand) Ltd. is a licensed securities company that is authorized by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is an exchange member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. Macquarie Securities (Thailand) Ltd does not endorse the result of the Corporate Governance Report of Thai Listed Companies but this Report can be accessed at: http://www.thai-iod.com/en/publications.asp?type=4. South Korea: In South Korea, unless otherwise stated, research is prepared, issued and distributed by Macquarie Securities Korea Limited, which is regulated by the Financial Supervisory Services. Information on analysts in MSKL is disclosed at http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002001000. South Africa: In South Africa, research is issued and distributed by Macquarie Equities South Africa (Pty) Ltd, a member of the JSE Limited. Singapore: In Singapore, research is issued and distributed by Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services license holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of research produced by Macquarie Capital (Europe) Limited, Macquarie Capital Markets Canada Ltd, Macquarie Equities South Africa (Pty) Ltd and Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures Act. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group

Asia Research Head of Equity Research

Peter Redhead (Global – Head) (852) 3922 4836

Jake Lynch (Asia – Head) (852) 3922 3583

David Gibson (Japan – Head) (813) 3512 7880

Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles/Auto Parts

Janet Lewis (China) (852) 3922 5417

Zhixuan Lin (China) (8621) 2412 9006

Leo Lin (China) (852) 3922 1098

Takuo Katayama (Japan) (813) 3512 7856

James Hong (Korea) (822) 3705 8661

Amit Mishra (India) (9122) 6720 4084

Financials

Scott Russell (Asia) (852) 3922 3567

Dexter Hsu (China, Taiwan) (8862) 2734 7530

Elaine Zhou (Hong Kong) (852) 3922 3278

Keisuke Moriyama (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Suresh Ganapathy (India) (9122) 6720 4078

Thomas Stoegner (65) 6601 0854 (Malaysia, Singapore)

Gilbert Lopez (Philippines) (632) 857 0892

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

David Ng (China, Hong Kong) (852) 3922 1291

Conrad Werner (Singapore) (65) 6601 0182


Consumer and Gaming

Linda Huang (Asia, China, Hong Kong) (852) 3922 4068

Zibo Chen (China, Hong Kong) (852) 3922 1130

Terence Chang (China, Hong Kong) (852) 3922 3581

Satsuki Kawasaki (Japan) (813) 3512 7870

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

KJ Lee (Korea) (822) 3705 9935

Stella Li (Taiwan) (8862) 2734 7514

Amit Sinha (India) (9122) 6720 4085

Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)

Karisa Magpayo (Philippines) (632) 857 0899

Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Timothy Lam (China, Hong Kong) (852) 3922 1086

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

Corinne Jian (Taiwan) (8862) 2734 7522

Marcus Yang (Taiwan) (8862) 2734 7532

Conrad Werner (ASEAN) (65) 6601 0182

Industrials

Janet Lewis (Asia) (852) 3922 5417

Patrick Dai (China) (8621) 2412 9082

Leo Lin (China) (852) 3922 1098

Kunio Sakaida (Japan) (813) 3512 7873

James Hong (Korea) (822) 3705 8661

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Internet, Media and Software

Wendy Huang (Asia, China) (852) 3922 3378

David Gibson (Asia, Japan) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Nathan Ramler (Japan) (813) 3512 7875

Soyun Shin (Korea) (822) 3705 8659

Abhishek Bhandari (India) (9122) 6720 4088

Oil, Gas and Petrochemicals

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Aditya Suresh (Asia, China) (852) 3922 1265

Anna Park (Korea) (822) 3705 8669

Duke Suttikulpanich (ASEAN) (65) 6601 0148

Isaac Chow (Malaysia) (603) 2059 8982

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086

Wei Li (China, Hong Kong) (852) 3922 5494

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838


Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

William Montgomery (Japan) (813) 3512 7864


Abhishek Bhandari (India) (9122) 6720 4088

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Coria Chow (China) (852) 3922 1181

Anna Park (Korea) (822) 3705 8669

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Allen Chang (Greater China) (852) 3922 1136

Jeffrey Ohlweiler (Greater China) (8862) 2734 7512

Patrick Liao (Greater China) (8862) 2734 7515

Louis Cheng (Greater China) (8862) 2734 7526

Kaylin Tsai (Greater China) (8862) 2734 7523

Telecoms

Nathan Ramler (Asia, Japan) (813) 3512 7875

Danny Chu (Greater China) (852) 3922 4762

Soyun Shin (Korea) (822) 3705 8659

Chirag Jain (India) (9122) 6720 4352

Prem Jearajasingam (ASEAN) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417


Azita Nazrene (ASEAN) (603) 2059 8980

Utilities & Renewables

Alan Hon (Hong Kong) (852) 3922 3589


Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (44 20) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (44 20) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (44 20) 3037 4340

Economics

Peter Eadon-Clarke (Global) (813) 3512 7850

Larry Hu (China, Hong Kong) (852) 3922 3778

Tanvee Gupta Jain (India) (9122) 6720 4355

Quantitative / CPG

Gurvinder Brar (Global) (44 20) 3037 4036

Woei Chan (Asia) (852) 3922 1421

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

Strategy/Country

Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769


Erwin Sanft (China, Hong Kong) (852) 3922 1516

Peter Eadon-Clarke (Japan) (813) 3512 7850

Chan Hwang (Korea) (822) 3705 8643

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512


Jayden Vantarakis (Indonesia) (6221) 2598 8310

Anand Pathmakanthan (Malaysia) (603) 2059 8833


Conrad Werner (Singapore) (65) 6601 0182

Alastair Macdonald (Thailand) (662) 694 7753

Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Miki Edelman (Global) (1 212) 231 6121

Jeff Evans (Boston) (1 617) 598 2508

Jeffrey Shiu (China, Hong Kong) (852) 3922 2061

Sandeep Bhatia (India) (9122) 6720 4101

Thomas Renz (Geneva) (41 22) 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Eric Roles (New York) (1 212) 231 2559

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Amelia Mehta (Singapore) (65) 6601 0211

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44 20) 3037 4882

Christina Lee (UK/Europe) (44 20) 3037 4873

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Daniel Clarke (Taiwan) (8862) 2734 7580

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44 20) 3037 4905

This publication was disseminated on 07 October 2016 at 01:53 UTC.

global what caught my eye? v -...

Documents