morning meeting hk fsm

8/8/2019 Morning Meeting HK FSM

1/23

MONTHLY GLOBAL MARKETUPDATE AUG 2010

PAGE2 INDICES3 MARKET INFORMATION5 MARKET AND SECTOR REVIEWS21 BONDS

PRESENTED BY IFAST FINANCIAL (HK) LTD

p5. USA

p6. Europe

p7. Japan

p8. Singapore

p9. Malaysia

p10. Indonesia

p11. Thailand

p12. South Korea

p13. India

p14. China

p15. Taiwan

p16. Hong Kong

p17. Australia

p18. Brazil

p19. Russia

p20. Technology


2/23

MONTHLY GLOBAL MARKET UPDATE AUG 2010. PRESENTED BY IFAST FINANCIAL (HK) LTD

PAGE2

INDICES

US Market & Est PE

SOURCE: BLOOMBERG & IFAST COMPILATIONS

Index (x) Stoxx 600 & Est PE


Index (x)

Nikkei 225 & Est PE


Index (x)

FTSE STI & Est PE


Index (x) Hang Seng Mainland Enterprise Index & Est PE


Index (x)

Nasdaq (Technology Heavy) & Est PE


Index (x)

SENSEX & Est PE


Index (x) MSCI Asia ex-Japan & Est PE


Index (x)

700

800

900

1000

1100

1200

1300

1400

1500

1600

Ju

l-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-

08

May-0

8

Ju

l-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-

09

May-0

9

Ju

l-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Ju

l-10

0

4

8

12

16

20

S&P 500 (LHS) Est PE (RHS)

1000

1200

1400

1600

1800

2000

2200

2400

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

0

5

10

15

20

25

30

Nasdaq100 (LHS) Est PE (RHS)

1000

1400

1800

2200

2600

3000

3400

3800

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

0

10

20

30

FTSE STI (LHS) Est PE (RHS)

6000

8000

10000

12000

14000

16000

18000

Ju

l-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-

08

May-0

8

Ju

l-08

Sep-0

8

Nov-0

8

Jan-0

9

May-0

9

Ju

l-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Ju

l-10

0

5

10

15

20

25

30

35

40

45

50

NKY Index (LHS) Es t. PE (RHS)

7500

10000

12500

15000

17500

20000

22500

Ju

l-07

S

ep-0

7

N

ov-0

7

Jan-0

8

M

ar-

08

M

ay-0

8

Ju

l-08

S

ep-0

8

N

ov-0

8

Jan-0

9

M

ar-

09

M

ay-0

9

Ju

l-09

S

ep-0

9

N

ov-0

9

Jan-1

0

M

ar-

10

M

ay-1

0

Ju

l-10

0

4

8

12

16

20

24

28

SENSEX (LHS) Est PE (RHS)

6000

8000

10000

12000

14000

16000

18000

20000

22000

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

0

5

10

15

20

25

30

HSCEI (LHS) Est PE (RHS)

100

200

300

400

500

600

700

Ju

l-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-

08

May-0

8

Ju

l-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-

09

May-0

9

Ju

l-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Ju

l-10

5

15

25

35

MXASJ Index (LHS) Es t PE (RHS)

150

200

250

300

350

400

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

4

6

8

10

12

14

16

18

20

Stoxx 600 (LHS) Est PE (RHS)


3/23


PAGE3

MARKET INFORMATION (AS AT 29 JUL 2010)

INDEX AS AT29 JUL 2010

CHANGE SINCE30 JUN 2010 (%)

2010RETURN YTD (%)

2009RETURN (%)

5 YEARBOND YIELD (%)

USA (S&P 500) 1101.53 6.9% -1.2% 23.5% 1.66

Europe (Stoxx 600) 256.26 5.3% 0.9% 28.0% 1.71

Japan (Nikkei 225) 9696.02 3.3% -8.1% 19.0% 0.36

Emerging Markets (MSCI EM) 993.84 8.3% 0.4% 74.5% 4.9

Asia ex Japan (MSCI Asia ex Japan) 488.07 5.7% 0.6% 68.3% 3.0

Singapore (STI) 2981.16 5.1% 2.9% 64.5% 0.61

Hong Kong (HSI) 21093.82 4.8% -3.6% 52.0% 1.35

Taiwan (Taiwan Weighted) 7798.99 6.4% -4.8% 78.3% 0.94

South Korea (KOSPI) 1770.88 4.3% 5.2% 49.7% 4.38

China (HS Mainland 100) 6728.3 4.0% -3.7% 61.3% 2.64

Malaysia (KLCI) 1358.41 3.4% 6.7% 45.2% 3.41

Thailand (SET Index) 854.59 7.2% 16.3% 63.2% 2.97

India (SENSEX) 17992 1.6% 3.0% 81.0% 7.56

Indonesia (JCI) 3096.816 6.3% 22.2% 87.0% 7.53

Russia (RTSI$) 1503.68 12.3% 4.1% 128.6% 6.72

Brazil (IBOV) 66953.8281 9.9% -2.4% 82.7% 12.49

Australia (S&P/ASX 200) 4524.1 5.2% -7.1% 30.8% 4.84

Technology (NASDAQ)1860.3 7.0% 0.0% 53.5% -

P/E YR 2010 P/E YR 2011 P/E YR 2012EARNINGS

GROWTH 2010 (%)EARNINGS

GROWTH 2011 (%)

USA (S&P 500) 13.5 11.5 10.1 35.0 17.6

Europe (DJ Stoxx 600) 11.6 9.8 8.7 33.4 18.7

Japan (Nikkei 225)* 18.0 16.0 12.4 90.2 12.9

Emerging Markets (MSCI EM) 12.2 10.5 9.4 37.0 16.8

Asia ex Japan (MSCI Asia ex Japan) 13.5 12.1 10.7 29.4 11.6

Singapore (STI) 14.7 13.0 12.2 20.0 13.1

Hong Kong (HSI) 12.6 10.7 9.3 21.5 17.5

Taiwan (Taiwan Weighted) 13.3 11.8 10.9 83.8 13.0

South Korea (KOSPI) 9.9 9.1 8.3 63.3 9.3

China (HS Mainland 100) 13.4 11.6 10.1 22.3 16.4

Malaysia (KLCI) 15.5 13.7 12.5 27.7 12.8

Thailand (SET Index) 12.1 10.4 9.5 14.3 16.1

India (SENSEX) 18.4 15.3 12.8 14.7 20.3

Indonesia (JCI) 15.4 12.8 11.1 103.9 19.8

Russia (RTSI$) 7.8 6.6 5.7 69.1 18.0

Brazil (IBOV) 12.9 10.0 8.6 27.4 29.0

Australia (S&P/ASX 200) 11.1 10.4 - 14.5 6.6

NASDAQ 100 (Technology Heavy) 15.3 13.3 11.7 27.3 14.9

SOURCE: IFAST COMPILATIONS, BLOOMBERG ESTIMATESALL EARNINGS GROWTH FIGURES WERE UPDATED AS AT END JUN 10

RETURNS ARE IN THE RESPECTIVE LOCAL CURRENCY TERMS AND MSCI INDEX RETURNS ARE IN USD TERMS

MARKET INFORMATION


4/23


PAGE4

EARNINGS YIELDEARNINGS YIELD 2010 (%)

5 YEARBOND YIELD (%)

EXCESS YIELD (%)

USA (S&P 500) 8.7% 1.7% 7.0%

Europe (DJ Stoxx 600) 10.2% 1.7% 8.5%

Japan (Nikkei 225)* 6.3% 0.4% 5.9%

Emerging Markets (MSCI EM)** 8.1% 4.9% 3.2%

Asia ex Japan (MSCI Asia ex Japan) 7.4% 3.0% 4.4%

Singapore (STI) 7.7% 0.6% 7.1%

Hong Kong (HSI) 9.3% 1.3% 8.0%

Taiwan (Taiwan Weighted) 8.5% 0.9% 7.6%

South Korea (KOSPI) 11.0% 4.4% 6.7%

China (HS Mainland 100)+ 8.7% 2.6% 6.0%

Malaysia (KLCI) 7.3% 3.4% 3.9%

Thailand (SET Index) 9.6% 3.0% 6.7%

India (SENSEX)* 6.5% 7.6% -1.0%

Indonesia (JCI) 7.8% 7.5% 0.3%

Russia (RTSI$) 15.1% 6.7% 8.4%

Brazil (IBOV) 10.0% 12.5% -2.5%

Australia (S&P/ASX 200) 9.6% 4.8% 4.8%

MARKET STAR RATINGS OUR 3 YEAR VIEW

Asia ex-Japan 4.0 Very Attractive

Emerging Markets 4.5 Very AttractiveUS 4.0 Very Attractive

Europe 4.0 Very Attractive

Japan 3.0 Attractive

MARKET STAR RATINGS OUR 3 YEAR VIEW

Singapore 4.0 Very Attractive

China 4.5 Very Attractive

Hong Kong 4.5 Very Attractive

Technology 4.0 Very Attractive

South Korea 4.5 Very Attractive

Indonesia 3.5 Attractive

India 3.5 Attractive

Thailand 3.5 Attractive

Malaysia 3.5 Attractive

Taiwan 4.0 Very Attractive

Brazil 3.5 Attractive

Russia 4.0 Very Attractive

Australia 3.5 Attractive

SOURCE: IFAST FINANCIAL COMPILATIONS, BLOOMBERG ESTIMATES. EARNINGS YIELD IS THE RECIPROCAL OF THE PRICE-EARNINGS RATIO. IT IS BASICALLYTHE AMOUNT OF EARNINGS YOU PURCHASE FOR EVERY DOLLAR WORTH OF THE STOCK (I.E. IF A MARKET HAS AN ESTIMATED PE OF 12X, THE EARNINGS YIELD IS 8.3%)

*JAPAN AND INDIA PE FORECASTS ARE BASED ON FISCAL YEAR ENDED MARCH 2009, 2010 AND 2011 RESPECTIVELYAND ALL RETURNS ARE IN THEIR RESPECTIVE LOCAL CURRENCY TERMS.

+THE HANG SENG MAINLAND 100 INDEX (HSML100) COMPRISES BOTH H-SHARE COMPANIES AND RED-CHIP STOCKS AS WELL AS SHARES OF OTHER HONGKONG LISTED MAINLAND COMPANIES .

HSML100 INDEX DERIVES A MAJORITY OF THEIR SALES REVENUE FROM MAINLAND CHINA.THIS SUMMARY IS NOT TO BE CONSTRUED AS AN OFFER OR SOLICITATION FOR THE SUBSCRIPTION, PURCHASE OR SALE OF ANY FUND. NO INVESTMENT DECISION

SHOULD BE TAKEN WITHOUT FIRST VIEWING A FUND'S PROSPECTUS. ANY ADVICE HEREIN IS MADE ON A GENERAL BASIS AND DOES NOT TAKE INTO ACCOUNT THESPECIFIC INVESTMENT OBJECTIVES OF THE SPECIFIC PERSON OR GROUP OF PERSONS. PAST PERFORMANCE AND ANY FORECAST IS NOT NECESSARILY INDICATIVE OFTHE FUTURE OR LIKELY PERFORMANCE OF THE FUND. THE VALUE OF UNITS AND THE INCOME FROM THEM MAY FALL AS WELL AS RISE. OPINIONS EXPRESSED HEREIN

ARE SUBJECT TO CHANGE WITHOUT NOTICE. PLEASE READ OUR DISCLAIMER

MARKET INFORMATION


5/23


PAGE5

SECTOR REVIEW

REGIONAL MARKETS UPDATE

US MARKET (4.0 STARS VERY ATTRACTIVE)

ISM Manufacturing index fell to 56.2 in Jun 10 from 59.7 in May 10

ISM Non-Manufacturing composite index fell to 53.8 in Jun 10 from 55.4 in May 10

Factory orders fell 1.4% m-o-m in May 10 after a revised 1% increase in Apr 10

Nonfarm payrolls fell 125,000 in Jun 10, after a revised gain of 433,000 in May 10

Unemployment rate fell to 9.5% in Jun 10 from 9.7% in May 10 Advance Retail Sales fell 0.5% m-o-m in Jun 10 after a revised 1.1% m-o-m decrease in May 10

Business inventories rose 0.1% m-o-m in May 10 after a 0.4% increase in Apr 10

Producer Price Index fell 0.5% m-o-m in Jun 10 after a 0.3% decline in May 10

Existing home sales fell 5.1% m-o-m in Jun 10, after a 2.2% decline in May 10

Consumer confidence fell to 50.4 in Jul 10 from 52.9 in Jun 10

Index of Leading Indicators fell 0.2% m-o-m in Jun 10, after a revised 0.5% increase in May 10

MARKET OUTLOOK

Unemployment continues to drag on the economy, as nonfarm payrolls declined by 125,000 in June 2010. Payroll data was skewed by a decline intemporary census workers, but private payrolls gained just 83,000 in June, less than the 110,000 forecasted. Nevertheless, private sector additionshave been positive for every month in 2010 resulting in net hiring of 593,000, in stark contrast to 2009 where private employers collectively slashed4.6 million jobs.

As anticipated, June existing home sales plunged in the absence of the homebuyer tax credit. Government policies continue to mask the truenature of demand in the US housing market, and with volatility in existing home sales expected to continue over the next few months, housingsales data may be less useful for analysis. On the supply side, inventory levels remain elevated, suggesting that homebuilders may have to scaledown activity for a substantially long period to allow existing home stock to deplete.

In contrast to the dim outlook painted by economic indicators, corporate profits indicate that things are indeed picking up. Since 2Q 2010reporting season began, quarterly estimated earnings for S&P 500 companies have been revised upwards by 5% (year-on-year growth in quarterlyearnings is almost 50%), a reflection of the better-than-expected earnings posted. Technology bellwethers like IBM and Microsoft have reportedstronger-than-expected earnings, but maintained conservative outlooks given the uncertainty associated with European debt problems.

The conservative stance by most corporations has possibly had some impact on slowing the overall job-creation process, but withcorporations sitting on huge amounts of cash (US$1.8 trillion for nonfinancial companies as at end March 2010, according to the Federal Reserve),the low interest rate environment may soon force companies to deploy this cash into more profitable business investments, kick-starting jobcreation in a big way.


6/23


PAGE6

SECTOR REVIEW


EUROPE (4.0 STARS VERY ATTRACTIVE)GERMANY

Industrial production gained 2.6% m-o-m in May 10, after a revised 1.2% gain in Apr 10

Factory orders fell 0.5% m-o-m in May 10, after a revised 3.2% gain in Apr 10

ZEW economic sentiment survey decline to 21.2 in Jul 10, down from 28.7 in Jun 10

German IFO Business Climate index rose to 106.2 in Jul 10, up from 101.8 in Jun 10

Preliminary estimates for PMI manufacturing rose to 61.2 in Jul 10, up from actual 58.4 in Jun 10 while preliminary estimates for PMIservices rose to 57.3 in Jul 10, up from actual 54.8 in Jun 10

FRANCE

Industrial production gain 1.7% m-o-m in May 10, after a revised 0.5% decline in Apr 10

Business confidence indicator rose to 98 in Jul 10, up from a revised 96 in Jun 10

Preliminary estimates for PMI manufacturing fell to 53.7 in Jul 10, down from actual 54.8 in Jun 10 while preliminary estimates forPMI services rose to 61.3 in Jul 10, up from actual 60.8 in Jun 10

UNITED KINGDOM

Industrial production rose 0.7% m-o-m in May 10, after a 0.7% decline in Apr 10

Nationwide consumer confidence fell slightly to 63 in Jun 10, down from a revised 66 in May 10

PMI manufacturing decline slightly to 57.5 in Jun 10, down from actual 58 in May 10 while PMI services decline slightly to 54.4 in Jun10, down from actual 55.4 in May 10

Rightmove House Prices index decline 0.6% m-o-m in Jul 10, after a 0.3% gain in Jun 10 UK GDP advance estimates grew by 1.1% q-o-q in 2Q10, after an actual 0.3% q-o-q growth in 1Q10

MARKET OUTLOOK

UK was the first major European economy to announce advance estimates for 2Q 2010 GDP growth. The economy grew 1.1% quarter-on-quarterin 2Q 2010, surprising on the upside of analysts expectation of a milder 0.6% growth. On a year-on-year basis, the economy grew by 1.6% in 2Q2010. This is the fastest pace of growth in four years. With inflation above target and stronger-than-expected growth, Bank of England will have tocarefully weigh their options when next deciding on the benchmark interest rate. However, with doubt over the sustainability of current rate ofgrowth, analysts are not expecting any rate hikes to take place until early 2011.

All three major European economies continue to see their manufacturing and services sector expand as the PMI indices for respectivesectors and countries remain above the 50.0 points mark which indicates growth. Germany saw the biggest increase in both manufacturing andservices sector as the PMI manufacturing index rose to 61.2 in July and PMI services index rose to 57.3 in July.

On 23 July 2010, the Committee of European Banking Supervisors (CEBS) released the bank stress test results. The stress test is conductedon a sample of 91 European banks which represents 65% of the European market in terms of total assets. Based on their adverse scenarioanalysis, 7 banks would see their Tier 1 capital ratios fall below 6% (threshold of 6% is used as a benchmark solely for the purposes of this stresstest) and will need to raise a total capital of 3.5 billion euro. The stress tests scenario were leaked before the scheduled press release and analystsare criticizing that the stress scenario used are overly optimistic, a poor reflection of current market rates. However the response from the marketsince the official release of test results has been positive, suggesting that investors deem the findings as credible, at least for now.

The Stoxx 600 index has recorded a gain of 6.1% month-to-date as of 27 July 2010. On top of that, euro has appreciated against other majorcurrency since hitting a recent new low. For example, euro appreciated by 6.2% against USD month-to-date. While upward revision of consensusearnings estimates has slowed, it is still expecting earnings to grow at 33.4% and 18.7% in 2010 and 2011 respectively. This translates to aforward PE ratio of 11.7X and 9.9X for 2010 and 2011 respectively (in local currency terms). Europe remains attractively priced among developedmarkets. We maintain Europe at 4 stars Very Attractive.


7/23


PAGE7

SECTOR REVIEW


JAPAN 3.0 STARS (ATTRACTIVE) Bank of Japan (BOJ) held rate at 0.1%.

Industrial production grew 20.4% y-o-y in May following a revised 20.2% increase y-o-y in Apr 10.

Machine Orders rose 4.3% y-o-y in May 10, less than the market consensus of 10.8% y-o-y increase.

Merchandise Trade Export rose 27.7% y-o-y in Jun 10 after rising 32.1% y-o-y in May 10. Merchandise Trade Import increased26.1% y-o-y in Jun 10.

Consumer confidence rose to 43.6 in Jun 10 as compared to 42.7 in May 10.

MARKET OUTLOOK

Confidence of Japans large manufacturers rebounded for a fifth straight quarter, thanks to robust demand from Asia. Tankan Large ManufacturersIndex in the second quarter of 2010 climbed to 1 from negative 14, the first positive reading since the second quarter of 2008. The improvement inmanufacturers sentiment also exceeds the market consensus of minus 4. A positive reading means optimists outnumber pessimists. Largecompanies forecast rising sales will drive profits 21.6% higher in this fiscal year, up slightly from its previous forecast of 21.3% growth. The largemanufacturers planned to raise capital spending by an average of 4.4% for this financial year ending March 2011. It is the first gain in three years.The business confidence indices for all the categories of companies improved in the quarter, the first time since 1994. We believe that the pace ofJapanese economy recovery is accelerating.

The Bank of Japan (BOJ) raised its forecast on the countrys real economic growth for 2010 financial year ending March 2011 amidst growingconcerns on the Europe debt woes. It hiked the growth projection to 2.6% from earlier estimate of 1.8%. However, the bank remains its stance ondeflationary risk and said the CPI to turn positive as early as 2011 financial year. Japanese government has officially announced the country hasentered into a deflationary state in November 2009. Core CPI which excludes food and energy prices dropped 1.6% year-on-year in June 2010, thesharpest drop in history.

In the following weeks, Japanese listed companies will announce the first quarter earnings result. It is believed that the earnings ofmanufacturing exporters could be hurt by the rapid appreciation of Japanese yen. Nikkei 225 Index plunged 15.4% while the yen surged 5.7% inthe second quarter of 2010. Japanese government warned that an abrupt drop in stock prices or an appreciation in the yen could hurt theeconomy. Large manufacturers called for a government intervention in currency market as the yen surged to an unaffordable level. However, unlikethe intervention in 2004, global central banks have slashed rates to record-low level and injected liquidity into the financial system. Thus, anypotential intervention could be effective only in short-term.

Estimated PE for the Japans market is at 18.1X and 16.1X for 2010 and 2011 as at 27 July 2010. We expect that Japan would recover at aslower pace than other regions and countries. Therefore, we still give Japanese market an attractive rating of 3 stars.


8/23


PAGE8

SECTOR REVIEW

SOUTH EAST ASIA

SINGAPORE 4.0 STARS (VERY ATTRACTIVE)

Purchasing Managers Index fell to 51.3 in Jun 10 from 52.2 in May 10

Electronic Sector PMI fell to 50.5 in Jun 10 from 53.7 in May 10

Non-oil Domestic Exports rose 28.7% y-o-y in Jun 10, after a revised 24.3% gain in May 10

Jun 10 CPI rose 2.7% y-o-y, following the 3.2% increase in May 10 Retail sales fell 0.9% in May 10, after a revised 2% m-o-m decline in Apr 10

Industrial production fell 23.4% m-o-m in Jun 10, after a 5.2% increase in May 10

Bank loans and advances rose 8% y-o-y in May 10, after a 17.3% y-o-y increase in Apr 10

Advance GDP estimate for 2Q 10 at 26% q-o-q annualised from revised 45.9% in 1Q 10

MARKET OUTLOOKGDP growth in 2Q 2010 came in at 26% quarter-on-quarter annualised, stronger than the 23% growth forecasted. In addition, 1Q 2010 GDPgrowth was revised upwards from 32.1% quarter-on-quarter (annualised) to 45.9%. In light of the strong 1H 2010 which saw the economy expandby 18.1% year-on-year, the government raised its full-year growth forecast to between 13% and 15%, up from 7% to 9% previously.

Given that the bulk of the strong growth seen in 2Q 10 was due to the surge in biomedical and electronics manufacturing, Singapores growthis still highly dependent on the sustainability of manufacturing sector growth. Junes industrial production came in weaker-than-expected with thebiomedical manufacturing sector index losing 51.9% month-on-month, dragging industrial production 23.4% lower in June. Given the sudden drop-off in biomedical production, we are looking at 2Q 10s GDP growth being revised lower, and it is highly likely that Singapores economy willcontract in the 2H 10. This should not be interpreted as a double-dip recession; rather, the drop-off in growth simply reflects the huge fluctuationsin the cyclical manufacturing sector.

On the back of positive earnings news flow, 2010, 2011 and 2012 earnings for STI companies have been revised upwards by 20.0%, 13.1%and 6.1% respectively (as of 29 July 2010). The Singapore market now trades at an estimated 14.7X 2010 earnings, but just 13X based on 2011estimated earnings. European debt problems appear largely contained at the moment, with little evidence of a contagion impact on the Singapore

economy. We maintain a 4 star very attractive rating on the Singapore equity market.


9/23


PAGE9

SOUTH EAST ASIA

MALAYSIA 3.5 STARS (ATTRACTIVE)

Exports grew at a smaller pace of 21.9% y-o-y in May 10, mainly due to a pullback in demand for E&E (Electronic & Electrical)exports. Imports growth soared to 34.2% y-o-y.

IPI growth reported a 12.5% in May 10 with growth easing in manufacturing and electricity sectors. Mining sector registered amarginal decrease of 0.2%.

Leading index growth slowed to 3.1%, pointing to a slower economic growth in 2H 2010. CPI increased at a faster rate of 1.7% in Jun 10.

BNM raised Overnight Policy Rate (OPR) by 25 basis points to 2.75% during its latest Monetary Policy Committee meeting on 8 Jul2010 to normalise monetary conditions.

MARKET OUTLOOK

SECTOR REVIEW

Malaysia exports grew at a slower pace of 21.9% year-on-year in May 2010 (Apr 10: 26.6%), mainly due to a pullback in demand for E&E productsexports, which only rose 12.8% (April 2010: 21.6%). Imports growth soared to 34.2% year-on-year in May 2010 (April 2010: 27.0%), boosted by

the growth of intermediate goods, which rose 35.1%. In tandem with global economic recovery, exports growth is expected to remain healthy,supported by the strong demand in the global E&E sector. Imports growth could remain strong, driven by the firm consumer and businessconfidence, as measured by MIERs CSI (Consumer Sentiment Index) and BCI (Business Conditions Index) of 110.4 and 119.6 respectively in 2Q2010.

The IPI growth reported a 12.5% year-on-year in May 2010 (April 2010: 10.7%), due to the increases in manufacturing and electricity sectors.However, the mining sector posted a marginal decrease of 0.2%, caused by the decrease in crude oil sector.

Leading index grew at a slower pace of 3.1% in May 2010 (Apr 10: 4.2%), indicating that the economic growth in 2H 2010 could slow down,but will remain supported by the improving domestic and external demand.

Consumer Price Index grew at a faster pace of 1.7% in June 2010 (May 2010: 1.6%). Inflation is expected to grow moderately as Malaysiangovernment has taken its first step to reduce its subsidy bill by increasing the prices of fuel and sugar. Inflation is expected to remain between 2%to 3% in 2010. The subsidy rationalisation programme will be implemented gradually, and we expect the negative impact to the equity market to beminimal.

Bank Negara Malaysia (BNM) raised the OPR (Overnight Policy Rate) by 25 basis points to 2.75% during its latest Monetary PolicyCommittee meeting on 8 Jul 2010 to normalise monetary conditions. Interest rate hike might pause for the remaining of this year in view of the

cautious stance by the central bank towards the global economic recovery. Nonetheless, we opine that OPR could normalize back to around 3.25%to 3.50% in 2011 as the economy recovers.Backed by the strong economy rebound and better economic fundamentals, Malaysia market remains attractive with PE for 2010 and 2011 at

15.5X and 13.7X respectively as of 29 July 2010. Corporate earnings growth is expected to be 27.7% for 2010 and 12.8% for 2011. We maintain a3.5 stars Attractive rating for Malaysia market.


10/23


PAGE10

SOUTH EAST ASIA

INDONESIA 3.5 STARS (ATTRACTIVE)

Exports rose 36.0% y-o-y in May 10, after a revised 42.4% gain in Apr 10

Consumer confidence rose to 111.4 in Jun 10, up from 109.9 in May 10

Inflation rose to 5.1% y-o-y in Jun 10, up from 4.2% y-o-y in May 10

Bank Indonesia kept reference interest rate unchanged at 6.5% on 5 Jul 10

MARKET OUTLOOK

Exports growth slowed in May, rising 36.0% year-on-year in May after a 42.4% year-on-year gain in April. However, imports growth slowed at aneven faster pace, rising only 31.6% year-on-year in May compared to a 67.5% year-on-year growth in April. As a result, trade balance spiked from0.8 billion USD in April to 2.5 billion USD in May. The key contributors of exports growth was from oil products, rising 180.4% year-on-year in May,up from a 160.6% year-on-year growth in April. Non-oil & gas exports grew 27.0% year-on-year in May, appearing mild in comparison.

We are expect GDP growth in 2Q 2010 to show robust growth as the economy benefits from both strong domestic consumption as well asexternal trade driven by strong Asian demand. Consequently, consumer confidence index rose to 111.4 in June, up from 109.9 in May. Consumersremain optimistic for the fifteen straight months as the economy continues its robust expansion. Both sentiments on present situation and futureexpectations improved in June. They are particularly optimistic that family income will continue to improve as the sub indicator of family income forpresent situation and future expectations remains above 120 points.

Inflation accelerated to 5.1% year-on-year in June after a 4.2% year-on-year increase in May, exceeding analysts expectation of a 4.5%year-on-year increase. Core inflation, which excludes items with volatile price movement such as energy and food products, increased 4.0% year-on-year in June after a 3.8% increase in May.

Despite the spike in inflation, Bank Indonesia kept reference rate unchanged for eleventh month at 6.5%, bucking the rate rising trend in Asiaregion. The central bank is expecting inflationary pressure in the coming months but given the robust growth expected, they believe the economycan afford to be patient for a longer period of time. Bank Indonesia will however monitor inflationary pressure closely and will adjust its monetary

policy as and when needed so as to keep inflation rate within the targeted range of 4.0% to 6.0%.The JCI index gained 4.4% month-to-date as of 27 July 2010 as global equity markets recovers from Aprils sharp correction. Consensus

estimated earnings growth for Indonesia equity market was 36.3% and 16.9% in 2010 and 2011 respectively. This translates to a forward PE ratioof 14.1X and 12.1X for 2010 and 2011 respectively. Valuation based on 2011 earnings appears undemanding as we maintain Indonesia equitymarket at an Attractive rating of 3.5 stars.

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SOUTH EAST ASIA

THAILAND 3.5 STARS (ATTRACTIVE)

Customs exports rose 46.3% y-o-y in Jun 10, after a 42.1% gain in May 10

Consumer confidence rose to 69.1 in Jun 10, up from 67.6 in May 10

Consumer price index gained 3.3% y-o-y in Jun 10, after a 3.5% gain in May 10

Manufacturing production gained 17.2% y-o-y in May 10, after a revised 21.8% gain in Apr 10

Industrial capacity utilization rose to 67.3% in May 10, up from 62.9% in Apr 10 Thailand central bank hike benchmark interest rate by 25 bps to 1.5% on 14 July 2010

MARKET OUTLOOK

Thailand exports surpasses record value set before the global financial crisis, rising 46.3% year-on-year in June after growing 42.1% year-on-year

in May. Exports growth is significantly stronger than analysts expectation of a 34.5% year-on-year gain, the fastest growth in more than 18 years.The problem in Europe has shown minimal impact on exports as the country continues to benefit from strong Asian demand.

Industrial production growth slowed in May, rising 17.2% year-on-year compared to a revised 21.8% year-on-year growth in April. Politicalviolence was highlighted as the key factor for the slowing growth as factories suspended work during the same period. The Thai governmentbelieves that the slowdown will only be temporary and should rebound in June. Consumer confidence is also on the mend, rising to 69.1 in June,up from 67.6 in May on the back of strong economy activity.

Following the Monetary Policy Committee (MPC) meeting scheduled on 14 July 2010, the Bank of Thailand (BoT) raised the benchmarkinterest rate for the first time in almost two years. The benchmark interest rate is hike by 25 basis points to 1.5%. According to the MPC, the impactof the domestic political situation has on the Thai economy in 2Q 2010 proved to be limited as Thailand recorded strong economic growth in 1H2010. BoT also expects 2H 2010 to grow favorably as well.

Inflation rate retracted slightly to 3.3% year-on-year in June, down from 3.5% in May, modest compared to historical average. However, thecentral bank believes that inflationary pressure will return next year, in line with robust economic expansion. It is likely that the MPC will continueraising interest rate gradually over the next few scheduled meetings as present level of 1.5% remains accommodative and supportive of furthergrowth.

The SET Index gained 7.1% month-to-date as of 27 July 2010 (in local currency terms) after rising by 6.2% in June. Consensus estimatedearnings growth for Thailand equity market was 14.3% and 16.1% in 2010 and 2011 respectively. This translates to a forward PE ratio of 12.0Xand 10.4X for 2010 and 2011 respectively. Valuation based on 2011 earnings appears undemanding as we maintain Thailand equity market at anAttractive rating of 3.5 stars.

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NORTH ASIA

SOUTH KOREA 4.5 STARS (VERY ATTRACTIVE)

Korean Won (KRW) depreciated against USD by 1.9% YTD as of 30 Jul 10.

Bank of Korea (BOK) raised interest rate by 25 bps to 2.25%

The Consumer Price Index (CPI) grew at 2.6% y-o-y in Jun 10 after a rise of 2.7% y-o-y in May 10

Unemployment rate rose to 3.5% throughout Apr 10 to Jun 10. Exports grew strongly at 32.4% y-o-y while imports increased by 36.9% y-o-y in Jun 10.

MARKET OUTLOOK

South Koreas central bank has unexpectedly raised its benchmark seven-day repo rate by 25 bps from a record low of 2% to 2.25% in 9 July2010. It was the first rate hike since August 2008. The sudden rate hike surprises the market as they believe the rate hike will come only in

August or September. The BOK said that the main drive for possible rate hikes is the growing inflationary pressure. In the first half of 2010, theconsumer price rose 2.7% year-on-year, higher than the central banks target of 2.5%. It is expected that CPI may grow by around 3% in thesecond half. Although the price level remained within the banks target band of 2% to 4% for the next three years, upward momentum are expectedto gain continuously owing to the increase in demand-pull pressure associated with improving economic activity. Thus, the BOK needs to takeaction to maintain the price stability when the time is right.

On the other hand, South Korean economy expanded 1.5% in the second quarter of 2010, faster than the market estimate of 1.3% growth.The better-than-anticipated GDP growth was underpinned by exports, investment and consumption. The first half GDP growth was at 7.6%, thefastest pace in 10 years. The Bank of Korea (BoK) raised its forecast for the countrys GDP growth in 2010 again to 5.9% in June 2010 up fromApril 2010 forecast of 5.2%. It hints that the monetary policy may shift from economic growth to price stability. The robust recovery and risinginflationary risk increase the possibility of further rate hike.

On the corporate front, LG Electronics, the worlds second largest TV maker, announced a larger-than-expected slump of 90% in operatingprofit. The company suffered a loss in its mobile phone business as it lags behind its main competitors like Apple and Samsung. On the contrary,Samsung, the worlds biggest technology company based on revenues, reported record earnings for the second quarter in 2010. Hynix, the worldssecond-largest computer-memory chipmaker, posted a record operating profit in the same quarter.

According to the market consensus, as at 27 July 2010, the earnings growth in 2010 and 2011 is estimated to increase by 63.3% and 9.3%.Estimated PE for the market is at 9.9X and 9.1X for 2010 and 2011. As the valuation became attractive compared with other countries, we maintainSouth Korea market a very attractive rating of 4.5 stars.

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SOUTH ASIA

The June Purchasing Managers Index fell to 57.3 from 59.0 in May 10

Production at factories, utilities and mines increased 11.5% y-o-y in May 10, after increasing 17.6% y-o-y in Apr 10

May exports up by 35.1% y-o-y to 16.1 Billion USD as compared to a 36.2% y-o-y rise in Apr 10 exports

May Imports up by 48.5% y-o-y to 27.4 Billion USD as compared to 43.3% y-o-y rise in Apr 10 Imports WPI for the month of June was 10.6% and for the month of May was 10.2%

The Reserve Bank of India cumulatively increased the Repo rate by 50 bps and Reverse Repo by 75 bps in July, in two separate ratehikes

MARKET OUTLOOK

The Purchasing Managers Index for June fell to 57.3 from 59.0 in May, indicating a decrease in the industrial production in June.

Production at factories, utilities and mines for the month of May increased to 11.5% on a year on year basis, which is 4.7% lower than theBloomberg estimate of 16.2%. Although lower than the estimates, the production growth is still in double digits. Going further, we expectmoderation in production growth to happen as the base effect kicks in.

The WPI for the month of June is 10.6% and for the month of May was 10.2%. The WPI for May is lower than the Bloomberg estimate of10.8%. The inflation has been in double digits since February.

The recent fuel price hike, fuel price de-regulation, along with an already high level of inflation has forced RBI to increase the key policy ratestwice in July. On 2nd July, the RBI increased the Repo and Reverse Repo rates by 25 bps to 5.5% and 4.0% respectively. The RBI againincreased the key policy rates on 27 July 2010 during the monetary policy review. Repo rate was increased by 25 bps to 5.75% and the ReverseRepo rate was increased by 50 bps to 4.5%. RBI is trying hard to rein in inflation without sacrificing the growth of the economy or aggravating thescarcity of liquidity in the system. Also, the RBI is taking a slow and steady approach to rate hikes. Going forward, the RBI will have mid-quarterpolicy review meetings to take a stock of the situation. The next mid quarter policy meet is due on 16 September 2010.

However, the RBI has increased the projection for GDP growth for FY 2010-11 from 8% to 8.5%. The RBI has also increased the projectionfor inflation for March 2011 from 5.5% to 6%.

April imports and exports growth is high primarily due to base effect. However, on a month-on-month basis, exports dropped by 4.7% and theimports grew by 0.3%.

We maintain India market at 3.5 stars Attractive. As of 27 July 2010, the estimated PE ratio for SENSEX was at 18.5X and 15.4X for fiscalyear 2010 (ending March 2011) and 2011 (ending March 2012). Estimated earnings growths for the market are 14.7% and 20.3% for the tworespective years.

INDIA - 3.5 STARS (ATTRACTIVE)

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GREATER CHINA

CPI increased 2.9% y-o-y in Jun 10 as compared with 3.1% increase y-o-y in May 10

Export increased 43.9% y-o-y in Jun 10 as compared with 48.5% increase y-o-y in May 10

Imports increased 34.1% y-o-y in Jun 10 as compared with 48.3% increase y-o-y in May 10

Retail sales grew by 18.3% y-o-y in Jun 10 as compared with 18.7% increase y-o-y in May 10

Fixed Assets Investment grew y-o-y by 25.5% year-to-date as of end Jun 10 Industrial production grew y-o-y by 13.7% in Jun 10 as compared with 16.5% increase y-o-y in May 10

Purchasing Manager Index dropped to 52.1 point in Jun 10

M1 and M2 grew 15.7% and 24.6% y-o-y in Jun10 respectively

603.4 Billion Yuan New Loans in Jun 10

2Q GDP expanded 10.3% y-o-y

MARKET OUTLOOK

Chinas GDP expanded 10.3% year-on-year in 2Q 2010, slower than a 11.9% year-on-year growth in the first quarter. Although the pace of growthis slowing, it is still higher than the governments annual target of 8% in 2010. We are expecting slower growth in the second half of this year due tothe higher base in 2H 2009.

In 1H 2010, strong economic growth is driven by robust investment and domestic consumption. According to the Chinese government,investment and retail sales increased 25% and 18.2% year-on-year in the 1H 2010. In addition, rebound in exports also gives strong support to theeconomic growth. Exports grew 43.1% year-on-year and import grew even faster at 52.7% year-on-year in 1H10. Inflation remains moderate at2.9% in June, lower than May inflation rate, mainly due to the drop in fresh fruit prices. However, inflation remains one of the key concerns of theChinese government.

Property market finally showed signs of cooling down. New property prices dropped 0.1% month-on-month in June. Second hand propertydropped 0.3% mom in the same month. Together with a lower than expected inflation, it is not likely to see a rate hike in the near term. But we arestill believed that the Peoples Bank of China is likely to announce a rate hike in the 4Q 2010. Industrial production only rose 13.7% in June, Iowerthan market estimation of 15.1% growth. A slower growth in industrial is led by the drop in PMI since May.

As of 27 July 2010, RMB appreciated about 0.8% against USD after the Peoples Bank of China (PBoC) surprisingly decided to proceed withfurther reform of the RMB exchange rate regime and to increase the RMB exchange rate flexibility. The 1 year non-deliverable forward (NDF)shows that the market expects the RMB will appreciated about 1.5% against USD in the next 365 days.

Shanghai A: As of 28 July 2010, the estimated PE ratio is at 14.6X and 12.3X for 2010 and 2011. Estimated earnings growth is at 26.4% and

18.1% for 2010 and 2011.Hang Seng Mainland Enterprise Index [HSCEI]: As of 28 July 2010, the estimated PE ratio is at 13.7X and 11.6X for 2010 and 2011.

Estimated earnings growth is at 25.9% and 18.3% for 2010 and 2011.

Hang Seng Mainland 100 Index [HSML100]: As of 28 July 2010, the estimated PE ratio is at 13.5X and 11.6X for 2010 and 2011. Estimatedearnings growth is at 22.3% and 16.4% for 2010 and 2011.

At its current valuations, we remain very positive on both A share and China equity listed in Hong Kong in medium of three years. We givethe China market 4.5 stars very attractive, the highest rating among all countries, under the 3 year horizon.

CHINA 4.5 STARS (VERY ATTRACTIVE)

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GREATER CHINA

CPI went up 1.2% y-o-y in Jun 10, compared to a 0.75% y-o-y increase in May 10

Export orders rose 22.5% y-o-y in Jun 10, compared to a 34.0% y-o-y gain in May 10

Exports grew 34.1% y-o-y in Jun 10, compared to a 57.9% y-o-y gain in May 10

Imports grew 40.4% y-o-y in Jun 10, compared to a 71.4% y-o-y gain in May 10

Unemployment rate (seasonally adjusted) went down slightly from 5.22% in May 10 to 5.2% in Jun 10 Industrial production expanded 24.3% y-o-y in Jun 10, compared to a 31.0% y-o-y gain in May 10

MARKET OUTLOOK

Trade data has pointed to a strong export recovery of Taiwan, thanks to the robust Asias demand and the governments massive stimuluspackage. Exports and imports jumped 49.2% and 64.3% respectively in the first half of 2010 compared to a year earlier. In particular, capitalequipment and consumer products imports have both hit record high in the first half of the year, suggesting a comeback of corporate and consumerdemand.

Despite the impressive 1H data, we think that the growth of trade data has peaked and will likely slow down in the second half of the year.The newly signed cross-strait Economic Cooperation Framework Agreement (ECFA) will likely increase the bilateral trade between Taiwan andChina but the impact on trade will not materialise until 2011 when the tariff concession in the early harvest list starts. Therefore, investors shouldnot be surprised by a much slower growth in the months ahead.

On the corporate front, capital spending amongst Taiwans technology companies continue. Taiwan Semiconductor Manufacturing Co.(TSMC), the worlds largest custom chipmaker announced a US$9.3 billion expansion plan on a new chip plant in expectation of higher demand forthe advanced technology. According to industry group SEMI, TSMC is expected to spend $4.8 billion in capital expenditure excluding the new plantfor this year. This huge spending will be equal to 15% of global chip-equipment revenue and is a vote of confidence for the industry outlook.

As of 28 July 2010, the consensus PE ratio stood at 13.3X and 11.8X for 2010 and 2011 respectively. The market expects the earnings togrow 83.8% and 13.0% in 2010 and 2011. Noteworthily, the consensus earnings growths for 2010 2012 have well surprised our estimates madein July 2009. We give Taiwan a Very Attractive rating of 4.0 stars, under the three-year horizon.

TAIWAN 4.0 STARS (VERY ATTRACTIVE)

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GREATER CHINA

Purchasing Managers Index dropped to 52.6 in Jun 10, compared to 53.2 in May 09

Retail sales by value increased 19.7% y-o-y in May 10, compared to a 15.6% increase in Apr 10

CPI increased 2.8% y-o-y in Jun 10, compared to 2.5% increase y-o-y in May 10

Unemployment rate stayed to 4.6% in Jun 10 Exports increased 26.7% y-o-y in Jun 10, compared to 24.4% increase y-o-y in May 10

Centa-City Leading Index, which tracks the secondary residential property market, rose 2.6% m-o-m to 81.18 point as of 23 July10

MARKET OUTLOOK

Exports rose for a eighth straight month in June. It increased 26.7% year-on-year in June. Shipments to the US and Asia increased 29.4% and27.4% year-on-year respectively. It signals that there is an increase in demand in the US. Unemployment rate stayed at 4.6% in June 2010 as

there are more graduates and school leavers joining the labor market. However, according to the Manpower Services (HK) Ltd, the result of itssurvey indicates that there is a favorable hiring climate in the third quarter. Therefore, the rebound in unemployment rate is temporal. Retail salesrose for a ninth straight month in May due to increase in visitors. Sales grew 19.7% year-on-year in May.

Property prices in Hong Kong surged as Centa-City Leading Index which tracks secondary residential property prices rose 2.6% month-on-month as of 23 July 2010. On 28 July, a plot of land in the Peak district was auctioned by a privately owned developer for HKD 10.4 billion. Theprice is within market estimation of between HKD 8 to 12 billion. It shows that luxury residential continues to be hot even when the governmentannounced new measures to tackle the drastic rise in property prices. We believe that we are near the peak of the property market.

As of 28 July 2010, the estimated PE for the Hong Kong market stands at 12.6X and 10.7X for 2010 and 2011. Based on our revised figures,the estimated earnings growth for 2010 and 2011 is 21.5% and 17.5% respectively. We maintain Hong Kong market at a very attractive rating of4.5 stars.

HONG KONG 4.5 STARS (VERY ATTRACTIVE)

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SECTOR REVIEW

OCEANIA

Westpac Consumer Confidence Index was 113.1 in July 10, up from 101.9 in Jun 10

Home loans went up 1.9% m-o-m in May 10, compared to a 1.8% decline in Apr 10

Trade balance widened from A$ 134 million surplus in April 10 to A$ 1645 million surplus in May 10

Unemployment rate dropped from 5.2% in May 10, to 5.1% in Jun 10

Consumer inflation expectation dropped slightly to 3.3% in Jul 10, compared to 3.4% in Jun 10

The benchmark cash rate stayed at 4.5%

MARKET OUTLOOK

The new Prime Minister Julia Gillards Minerals Resource Rent Tax (MRRT) proposal has been agreed by the Australian mining giantsincluding BHP Billiton and Rio Tinto. Compared to the earlier Resource Super Profits Tax (RSPT) proposed by former Prime Minister KevinRudd, the new proposal includes a lower tax rate (from 40% to 30%), a higher cut-in rate and more depreciation allowances. Theresolution of the resources tax will likely ease investors fear over the impact on the resource sector which had supported the Australianeconomy during the global crisis.

Following the revised tax proposal, the Prime Minister Gillard has also called for Federal Election on 21 August 2010. Poll datasuggests Gillards Labor Party with a lead of 10 points (55% vs 45%) over the conservative Liberal/National coalition. Although the electionseason often makes investors worried over the political uncertainties, historical data has shown that business cycle plays a more dominantrole. We hence expect to see a rebound in the Australian equities as well as the Australian dollar, following the resolution of the resourcestax.

On the economic front, the recent data points to an easing inflation. The consumer prices went up 3.1% year-on-year in June, lowerthan expected while the consumer inflation expectation dropped slightly to 3.3% in July, compared to 3.4% in June. This suggests that themultiple rate-hikes by the central bank to curb inflation have started to effect. We believe the central bank may keep the benchmark

interest rate unchanged in the next policy meeting on the back of the European debt problems and signs of Chinese economic slowdown.According to the consensus, Australian equities represented by S&P / ASX 200 Index, is trading at 12.7X and 11.1X for the estimated

2009 and 2010 PE ratios (Australia's fiscal year ends in June FY2009 ends in June 2010). The market expects earnings to grow 14.5%in 2010 (as at 28 July 2010). We maintain Australia at a Attractive rating of 3.5 stars, under the three-year horizon.

AUSTRALIA 3.5 STARS (ATTRACTIVE)


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EMERGING MARKETS

PMI Manufacturing advanced slightly to 52.7 in Jun 10, compared to 52.4 in May 10

Industrial production surged 14.8% y-o-y in May 10, after a 17.2% y-o-y increase in Apr 10

Export grew 18.2% y-o-y in Jun 10, compared to a 47.7% y-o-y gain in May 10

Imports grew 50.2% y-o-y in Jun 10, compared to a 52.3% y-o-y gain in May 10 Vehicle Sales dropped 12.5% y-o-y in Jun 10, after a 1.7% y-o-y gain in May 10

Headline CPI decelerated to 4.8% y-o-y in Jun 10, compared to a 5.2% y-o-y in May 10

Unemployment rate went down from 7.5% in May 10 to 7% in Jun 10

The central bank raised the benchmark interest rate by 50bps to 10.75%, effective on 22 Jul 10

MARKET OUTLOOK

The central bank raised the benchmark interest rate by 50bps to 10.75% in July, while consensus estimated a 75bps hike. The lower-than-expected rate hike suggests that the consumption-driven economy may run out of steam amid concerns over the global economicslowdown.

Consumer data also suggests a slower domestic growth. Retail sales went up by 10.2% year-on-year in May, lower than expected.The headline CPI further decelerated to 4.8% in June from 5.2% in May, the lowest since February this year. Apart from a deceleration ofdomestic growth, Brazil may be vulnerable to the slowdown in Chinese economy one of the largest markets for its exports of commodityand agricultural products. In particular, the recent correction of iron ore prices and the flattish crude prices are likely to affect the earningsoutlook of Vale and Petrobra, two giants in the Bovespa Index. Overall, we expect the pace and the magnitude of rate hike to decreaseand the peak of this rate hike cycle will likely be lower than the prior cycle of 13.75%.

Regarding the valuation, as of 28 July 2010, the consensus PE ratio stood at 11.2X and 8.7X for 2010 and 2011 respectively. Theconsensus estimated earnings growths for 2010 and 2011 are 30.1% and 28.3% respectively. We maintain Brazil at an Attractive ratingof 3.5 stars.

BRAZIL 3.5 STARS (ATTRACTIVE)

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EMERGING MARKETS

PMI Manufacturing was 52.6 in Jun 10, up from 52.0 in May 10

Industrial production rose 9.7% y-o-y in Jun 10, after a 12.6% y-o-y increase in May 10

Exports grew 39.6% y-o-y in May 10, compared to a 59.2% y-o-y gain in Apr 10

Imports surged 40.7% y-o-y in May 10, compared to a 30.3% y-o-y gain in Apr 10 Retail sales gained 5.8% y-o-y in Jun 10, compared to a 5.1% increase in May 10

Consumer Prices rose 5.8% y-o-y in Jun 10, compared to 6% in May 10

Unemployment rate declined to 6.8% in Jun 10, compared to 7.3% in May 10

MARKET OUTLOOK

Russias worst drought in a decade has brought concerns on inflationary risk and economic recovery. High temperatures have destroyed

32% of land under cultivation. Prices of agricultural products may rise sharply and cause a spike in the food prices. Therefore, the easinginflation may end earlier and this may cause the central bank to hike rate earlier than the consensus forecast. We however think thedrought has limited impact to the Russian economy because the agricultural sector merely accounts for 4.5% of its GDP.

The Finance Ministry has proposed to raise taxes in the years ahead for oil/gas companies and some metallurgical companies inorder to reduce budget deficit next year. In spite of this, domestic energy companies have warned of possible production cut andinvestment delay amid uncertainties. At this stage, it is premature to conclude the impact on Russian equities and its economy as theseplans are just proposals and may be subjected to revision. Meanwhile, we expect to see debates between the energy companies and thegovernment.

Regarding the equity market, the dollar-measured RTS Index has jumped 20.8% (in USD terms, as of 27 July 2010) from theprevious bottom on 25 May 2010, thanks to a pickup in risk appetite and oil prices. It is important to point out that the RTS Indexsubstantially outperformed the oil in July and gained 10.6% (in USD terms, as of 27 July 2010) compared to 1.9% by Nymex crude oil (inUSD terms, as of 27 July 2010). This is in line with our view that the Russian equities could trend higher in the current price range.

As of 27 July 2010, the consensus PE ratio stood at 7.7X and 6.5X for 2010 and 2011 respectively. The estimated earnings growthfor 2010 and 2011 is 69.1% and 18.0% respectively. We maintain Russia at a Very Attractive rating of 4.0 stars.

RUSSIA 4.0 STARS (VERY ATTRACTIVE)

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SECTOR

GLOBAL TECHNOLOGY

North American Semiconductor Equipment Manufacturers book-to-bill ratio was 1.12 in May 10, down from 1.13 in Apr 10

Global chip sales surged 50.4% y-o-y for Apr 10, compared to a 58.3% y-o-y increase in Mar 10

US new orders for computer and electronic products rose 13.0% y-o-y in May 10, after jumping 17.5% in Apr 10

US inventory for computer and electronic products declined 4.0% y-o-y in May 10, after contracting 5.5% in Apr 10

ASIAN TECHNOLOGY

Semiconductor Equipment Association of Japan (SEAJ) book-to-bill ratio for Japanese fab-tool vendors went down from 1.07 in Apr10 to 1.13 in May 10

YTD (as of 28 June 2010, in USD), benchmark DRAM chip prices have dropped 14.8% while NAND chip prices have declined 6.0%

MARKET OUTLOOK

The US earnings season has started again with corporations reporting their 2Q results. Earnings of technology companies continue to beatthe expectation on average. Of 32 companies in the S&P 500 information technology index that have reported earnings, 24 of them (75%)have beat the consensus, suggesting further re-ratings ahead.

On the corporate front, Intel reported the best-ever quarterly earnings along with 34% sales growth due to the increased technologyspending by the corporate customers. Its revenues went up by 34% and topped US$ 10.7 billion in the second quarter. Microsoft, on the otherhand reported record revenue due to strong sales of the Windows 7 operating system and Office products. Its earnings grew by 48%compared to the same period a year ago. These results suggest a start of the technology replacement cycle and are likely to fuel a brighterindustry outlook.

Following the earnings surprises that we have seen so far, we expect the market to continue revising the estimates upwards. It isworthwhile to point out that the 2010 consensus earnings for the technology sector represented by NASDAQ 100 Index have alreadysurpassed our earlier estimate made in February 2010. This suggests that the market starts to re-price the earnings and growth outlook of thetechnology companies amid uncertainties over the global economic slowdown.

Despite the earnings upgrade, the valuation is still cheap compared to the historical average. According to the consensus estimates, theNASDAQ 100 Index is trading at 15.5X and 13.5X for the 2010 and 2011 PE ratios. The earnings are expected to grow by 23.8% and 15.2%in 2010 and 2011 respectively (as at 28 July 2010). We maintain the technology sector at a 4.0 star Very Attractive rating, under the three-year horizon.

TECHNOLOGY (4.0 STARS VERY ATTRACTIVE)

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SGS BONDS BENCHMARKYEARS TOMATURITY

OFFER INDICATIVE YIELD (%)AS AT 30 JUNE 2010

OFFER INDICATIVE YIELD (%)AS AT 29 JUL 2010

HKGB, Coupon 2.36%; Maturity 08/16/2010 2 year 1.00 0.466 0.78

HKGB, Coupon 2.88%, Maturity 06/17/2013 5 year 4.28 1.024 0.663

HKGB, Coupon 3.5%, Maturity 06/22//2015 7 year 6.51 1.546 1.286



OFFER YIELDS INCLUDE SALES CHARGE OF 0.1% AND COMMISSION CHARGE OF 0.3%SOURCE: IFAST FINANCIAL

HONG KONG INTERBANK RATES (HIBOR)

OVERNIGHT 1-WEEK 1-MONTH 2-MONTH 3-MONTH 6-MONTH 12-MONTH

25-Feb-10 0.03 0.0494 0.0696 0.1 0.13 0.24 0.52

31-Mar-10 0.045 0.0497 0.0986 0.12 0.15 0.25 0.59

30-Apr-10 0.048 0.064 0.0811 0.13 0.25 0.4 0.57

28-May-10 0.05 0.079 0.1975 0.2286 0.2689 0.4393 0.79

30-Jun-10 0.095 0.215 0.524 0.549 0.57 0.699 1.05

31-Jul-10 0.05 0.07 0.261 0.31 0.36 0.49 0.84

SOURCE: HKMA

COUNTRY / REGION PARAMETERCPI VALUE ON

30 MAY 2010 (YOY)CPI VALUE ON

30 JUN 2010 (YOY)BENCHMARK INTEREST

RATES AS AT 28 JUL 2010

CPI (core) 0.90% 0.90%US

CPI (all items) 2.00% 1.10%

0.25%

Europe CPI (core) 0.80% 0.90% 1.00%

Japan CPI (nationwide, all items) -0.90% -0.70% 0.10%Indonesia CPI 4.16% 5.05% 6.50%

Malaysia CPI 1.60% 1.70% 2.75%*

South Korea CPI (all items) 2.30% 2.60% 2.25%*

Hong Kong CPI (composite) 2.50% 2.80% 0.50%

Thailand CPI 3.50% 3.30% 1.50%*

China CPI (consumer prices) 3.10% 2.90% 5.31%

Taiwan CPI 0.74% 1.18% 1.375%

India WPI 10.16% 10.55% 4.50%*

Singapore CPI 3.20% 2.70% N.A.

*BENCHMARK INTEREST RATE HAS BEEN CHANGED SINCE LAST MONTH

SECTOR REVIEW

BONDS


22/23


PAGE22

Corporate Bond Spreads Against US 10-Yr Treasury


Historical Yields of HKG Bonds


Asian Dollar Debt is Attractive

SOURCE: JP MORGAN & IFAST FINANCIAL COMPILATIONS

BOND CHART OF THE MONTH

SECTOR REVIEW

Asian dollar debt delivered a total return of 2.50% in the monthof July as the yields fell about 40 bps. The difference betweenAsian dollar debt and 5-year US Treasuries have widened in themonth of June but came down significantly to 306 basis points.This is in line with historical average. However, given the betterdebt profile of Asian economies, a lower spread could be

justified and thus, we believe this current spread still presentsattractive investment opportunities for the bond investors.

Historical Yields of US Treasuries


HKG Bond Yield Curve


0

2

46

8

10

12

14

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

New JACI Composite (JACN)Non Investment GradeComposite Spread to US 5 Year T Note

0.0

1.0

2.0

3.0

4.05.0

6.0

Ju

l-05

Oc

t-05

Jan-0

6

Apr-

06

Ju

l-06

Oc

t-06

Jan-0

7

Apr-

07

Ju

l-07

Oc

t-07

Jan-0

8

Apr-

08

Ju

l-08

Oc

t-08

Jan-0

9

Apr-

09

Ju

l-09

Oc

t-09

Jan-1

0

Apr-

10

Ju

l-10

Yield(%)

2 Years Bond 10 Years Bond

0

2

4

6

8

1012

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

(%)

AA 10 YR Spread BB 10 YR Spread

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.54.0

4.5

5.0

Aug-0

7

Oc

t-07

Dec-0

7

Fe

b-0

8

Apr-

08

Jun-0

8

Aug-0

8

Oc

t-08

Dec-0

8

Fe

b-0

9

Apr-

09

Jun-0

9

Aug-0

9

Oc

t-09

Dec-0

9

Fe

b-1

0

Apr-

10

Jun-1

0

Yield (%)

2 Years Bond 10 Years Bond

0.0

0.5

1.0

1.5

2.0

2.53.0

1Month

3Month

6Month

1Year

2Year

5Year

10Year

15Year

Yield (%)

6/30/2010 7/31/2010


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PAGE23

SECTOR REVIEW

KEY DEVELOPMENTS

Central banks of major economies like Japan and Eurozone kept their benchmark interest unchanged in Julys meeting. As countries in Eurozone embark onausterity measures which mean reduced government spending, the monetary policy would have to be accommodating for economic growth. Meanwhile, inAsia region where inflationary pressures are starting to build, central banks continue to tighten their monetary policies. In fact, India had an unscheduledmeeting on 2 July to raise interest rate in order to arrest the inflationary threat while South Koreas decision to hike rate was also out of economistsexpectations.

In IMFs latest report, global economic growth in 2010 has been upgraded to 4.6%. However, this came on the back of better than expected economicgrowth in the first half of the year. IMF has warned that given Europes development, there is significant downside risk in the second half. Better economicgrowth numbers in Asia economies and robust earnings from US and European companies have led to a 8.5% gain in global equity markets. Other risky bondclasses like emerging market debt and high yield bonds have also performed well with the return of risk aversion. On the other hand, US Treasuries asrepresented by iBoxx USD Treasuries Total Return Index gained a flat 0.1% in June. Yields on 10 year and 2 year UST gained 11 bps (to 3.04%) and 3 bps(to 0.63%) respectively. Current yields are the lowest in a year, reflecting investors spike in risk aversion. (All data refers to month-to-date data as at 27 Jul 10in USD terms)

In Hong Kong, the CPI rose 2.8% year-on-year in June 2010 after a 2.5% gain in May 2010. It was the tenth consecutive monthly increase. Amongst theCPI components, the year-on-year increases were mainly contributed by electricity, gas and water prices. On the other hand, HIBORs continued to drop inJune 2010. Expectations of RMB appreciation have spurred capital inflows into Hong Kong. Sufficient liquidity in banking system drives down the localinterbank rates.

The issues of rising deficits and an improving economic landscape should work to the favour of investment grade, emerging market and high yieldbonds. We believe the short term yields in Hong Kong government bond will continue to decline because of the aggregate balance expansion and ampleliquidity in the banking system.

.

morning meeting hk fsm

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