Financial Risk Manager: Citigroup Strategy for 2009

Citigroup Strategy for 2009
Thursday, January 22, 2009

Investment Summary:

The dividend yield for Asia ex now stands at 4.2%, higher than the level in the market low of 1998 and the 1990 recession. The risk for the markets is to the upside more than the downside.

What remains cheap on mid cycle earnings/ dividend duration/ downside vs. prior recessions is mostly North Asia, amongst the defensives telecoms look attractive, amongst the interest rate sensitive the banks look attractive and in the cyclical space it is technology.
Large caps remain better value. It still pays to own what the consensus does not.
Earnings growth forecasts at -18.4% for 08 and -3.5% for 09 remain too high. During prior recessions EPS has declined by between 30% to 50%. Expect more monetary easing and more fiscal stimulus.
For the six emerging markets of Asia outflows have taken fund flows back to their mid-February 2004 level leaving just US$44bn of potential outflows until all fund inflows since SARS are out.
We continue to focus cheap sectors and markets, telecoms, banks and utilities remain favorites. We recently added to tech. HK, Korea, Taiwan and Malaysia are our overweight. We remain heavily focused on cash flow and dividend yield.

Dividend Duration:

Who’s in Charge – the Market, Earnings or the Consensus?

Markets are supposed to lead; not so in Asia
IBES consensus never picks the top nor the trough — On average, the IBES consensus lags the earnings cycle at the peak by 6 months. Upon recovery, IBES continues to forecast doom and gloom for a further 4 months
Markets have tended to recover after the 9th month of negative revisions
IBES EPS forecasts down to -18.4% for 08 — IBES forecasts for 2008 have come down from a peak of 10.8%. Prior growth slowdowns have led to EPS growth of -11% to -44%

Buying Tangibles, Not Dreams

Low P/CF outperforms during and ahead of economic slowdowns
High dividend yield outperforms during and ahead of economic slowdowns
There is not exponential premium for high EPS growth. Average EPS growth outperforms high EPS growth.
Focus on mid-cycle earnings, not current P/E

A Ratio for Every Season

Equity markets may lack the glamour of the fashion industry but to our surprise certain investment factors do better in certain quarters than others
May to July is P/CE season, followed by dividend yield season
As we move towards the August to October quarter and dividend yield has proven to be most successful, so banks, tech and materials would be overweights and still Taiwan,
HK and Singapore.
Market and flow-wise the next three months are weak historically

Goodbye Momo, Welcome Value

Myth: Decoupling. Busted, for Now

Growing consensus that Asia can decouple. We find no supportive evidence
Asian ROEs fell more in the 2001 downturn than in the three prior US recessions
A common misconception. North Asia is more US growth sensitive
Domestic consumption to GDP ratios have fallen in Asia, export ratios have risen
Stock market correlations stand at 30-year highs

What We Like and What to Avoid