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Investment Themes for 2011

February 2011
Michael Tjoajadi

The world economy is recovering from the financial crisis, with the emerging markets leading the way. As the US
embarks on another round of Quantitative easing we look at the challenges facing investors who must walk a
tightrope between the risks of deflation and new financial bubbles.

For professional advisers only. This material is not suitable for retail clients
Investment Themes for 2011

 Schroders Profile
 Themes For 2011
 Sweet spot for risk assets
 Search for yield
 East/ west divergence
 Sovereign debt restructuring in Eurozone
 Why Indonesia
 Disclosure

1
Themes for 2011

2
So goes the economy, so goes the market
Close link between S&P500 and labour market since 2007

Index 000’s
1600 250
1500 300
1400 350
1300
400
1200
450
1100
1000
500
900 550
800 600
700 650
600 700
07 08 09 10 11

US S&P 500 index US initial jobless claims (inverted), rhs

Source: Thomson Datastream, 4 January 2011.

3
Risk assets perform well in the recovery phase
“History does not repeat itself…but it does rhyme”

Phase/
Recovery Expansion Slowdown Recession
Asset

Excess
Equity 8.6 8.4 -8.4 7.4 Recession Recovery
return*
Output below Output below
trend, Growth trend, Growth
Government Excess decelerating, accelerating,
1.0 -1.0 0.0 2.1
Bonds return Inflation falling Inflation falling

Excess
High Yield 6.7 2.0 -11.9 11.7
return
Expansion Slow-down
Investment Excess Output above Output above
5.2 2.9 -1.9 7.3 trend, Growth trend, Growth
Grade return
accelerating, decelerating,
Inflation rising Inflation rising
Excess
Commodity 2.9 15.3 7.9 -4.4
return

Commodities Cash High Yield Equities

Source: Thomson DataStream, Schroders.


Data: Equity S&P 500 TR & US 10yr Govt. bonds from 1950 to 2010, BarCap US High Yield from 1983 -2010, BarCap US
Corporate Investment Grade from 1973 -2010, S&P GSCI Commodity.
Data for capacity utilisation and the unemployment rate in the US are used to estimate the output gap.
All risk return figures are in % and annualised for each phase of the cycle. Risk return numbers are relative to cash.

4
Purchasing managers’ point to further recovery
After a mid year lull in 2010, industrial activity has picked up
Manufacturing Purchasing Managers Index

Index

68
66
64 Phase 1 Phase 2
62
60 UK
58 EZ
56 US
54
China
52
50
48 South
46 Japan Korea
44
42
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

No. of months above the 50 level

Source: Schroders, Markit PMI, 4 January 2011.


EZ: Eurozone
5
Significant gap between output and employment
US GDP and jobs

Index (Base 100 = 15/02/2008)


102
101
100
99
98
97
96
95
94
08 09 10 11

US total civilian employment US real GDP level

Source: Thomson Datastream, 4 January 2011.

6
Labour market set to improve in the US
Surge in profits signals lower US unemployment

y/y% %
50 -5
40 -4
Profits rising, unemployment falling
30 -3
20 -2
10 -1
0 0
-10 1
-20 2
Profits falling, unemployment rising
-30 3
-40 4
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12
Real US corporate profit growth, y/y% , 1-year lead

1-year change in the unemployment rate (inverted), rhs

Source: Source: Thomson Datastream, Schroders, 5 January 2011.

7
East/ west divergence

8
Forecast GDP growth – a two speed recovery
Emerging countries account for more than half global growth

y/y%
5
Asia crisis Last US Baseline forecasts
4 recession
3
2

1
0

-1
-2

-3
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Growth contribution from the OECD countries Growth contribution from emerging markets
Global growth

Source: IMF, Consensus Economics, Schroders, December 2010


Please refer to the forecast risk warning in the important information

9
East/ west divergence
Inflation is also diverging in the developed and emerging worlds

y/y%

10
9
8
7
6
5
4
3
2
1
0
-1
-2
00 01 02 03 04 05 06 07 08 09 10 11

G7 CPI rate BRICs CPI rate

Source: Thomson Datastream, Schroders, 4 January 2011.


BRICs: Brazil, Russia, India and China. USD GDP-weighted.

10
Global tensions - imbalances persist
Current account balances – 2010

USD, billions

400

300

200

100

-100
-200

-300

-400

-500
US Euro area Newly industrialised Japan Emerging markets
Asian economies

Source: World Economic Outlook Database (October 2010), IMF


Newly industrialized Asian economies are composed of 4 countries: Hong Kong SAR, Korea,
Singapore, and Taiwan Province of China
11
The Euro in crisis
Sovereign debt restructuring in Eurozone

12
Government funding pressures persist
Total government debt refinancing in Euro periphery
€bn
80
72
68
70 64
60
60 53 54
50 50
50 46
42
38 39
40
29 28
30 25
20 19
20
10
10

0
J A S O N D J F M A M J J A S O N D
2010 2011

Spain Portugal Italy Ireland Greece


Source: Bloomberg, Schroders. 01/11/2010 : Redemptions and coupon payments

13
Will it all end in inflation ?
– Massive spare capacity in the global economy /
lack of credit growth

Versus..

– Helicopter Ben

14
Themes for 2011
Key points

Sweet spot and search for yield


–Moving into phase of recovery where corporate sector drives growth through increased employment and capital expenditure.
–US/ Europe/ Japan inflation and rates stay low, but emerging market inflation rates hike.
East/ West divergence
–Emerging markets to continue to generate more than half global growth
–Loose policy in West creates risk of inflation and asset bubbles in emerging markets
–Emerging market currencies expected to appreciate vs. developed
Sovereign debt restructuring in Eurozone
–Restructuring to become more attractive as appetite for fiscal consolidation wanes
–Renewed pressure on Euro, core / periphery divergence
Inflation/ deflation?
–Near term deflation pressures .
Asset allocation
–Equity valuations plus sustained recovery supports overweight in risk assets
–Adding to equity and commodity exposure, reducing high yield and credit
–Light on government bonds and cash
–Short EUR/ long USD. Long Asian EM currency

Please refer to the forecast risk warning in the important information

15
Why Emerging Market Indonesia?

16
Indonesian Economics
Expectation 2011

Source: Bloomberg, Economic Consensus, BI & MOF as of Dec 30,


2010
17 17
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Why INDONESIA?
Stable politics and robust macros: low debt and a conservative budget are comforting in an uncertain world. Key
milestone is Indonesia’s possible rating upgrade to investment grade;

Strong growth momentum: Indonesia stands tall among regional peers whose growth momentum is waning as
exports decelerate. Investment and consumption underpin Indonesia’s growth outlook;

Earnings momentum is robust for the market in 2011, with room for earnings upgrades by consensus as
expectations (for coal and plantation sectors)

18
INDO Inflation
14
12.14
12 11.03 11.06

10
8.17 7.92
8 6.96
5.80
6 5.05
3.65 3.43
4 2.83 2.78

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008 2009 2010

Source: BPS

19
INDO GDP Composition

Source: CEIC and Bloomberg

20
INDO GDP Growth Vs GDP Per Capita

Source: Central Bureau of Statistics

21
What Drives Investment: Stable Politics…

Source: CEIC and Bloomberg

22
Leading Indicators Shows Strong Domestic Demands

Source: CEIC and Bloomberg

23
24
Source: Economist Intelligence Unit
25
BB+ vs. BBB Rating

(Source: Fitch Ratings Oct 2010)


26
BB+ vs. BBB Rating

(Source: Fitch Ratings Oct 2010)


27
Kepemilikan SUN yang Dapat Diperdagangkan
Per 7 Februari 2011

Sumber: Dept. Keuangan RI


28 28
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Equity Market
Shanghai -15.80%

Nikkei -3.01%

Shenzen 4.98%

Hang Seng 5.15%

Taiw an Exc 8.80%

Strait Times Singapore 10.87%

Dow Jones 11.10%

BSE Sensex India 16.74%

Dax Jerman 17.16%

Malaysia 21.88%

Kospi Seoul 21.88%

PSEi Manila 37.62%

SET Bangkok 40.60%

IHSG 46.13%

-20% -10% 0% 10% 20% 30% 40% 50%

Source: Bloomberg
As of 30 December 2010
29
JCI – Over reaction creates opportunity for the courageous

Source: Bloomberg
As of 9 February 2011
30
JCI – How high can it go?

Source: Bloomberg

31
Source: Bloomberg
32
FY 2011 Earnings Growth by Sector

Source: Company and Bloomberg

33
JCI By Sector – Coal Mining
Key Drivers Key Risks
Multi-year earnings growth and re-rating potential;
Slowing demand in China, as the most
Higher thermal coal prices; influential importer may affect coal prices;
Favors producers with better exposure to export
markets and least constraint in production growth; Further delays in Indonesia’s power-plant
Supply: Constraint due to severe flooding in
completion may result in lower domestic
Australia; demand;
Cold weather conditions across Europe and USA Expected production growth is dependent on
underpin strong demand
the delivery of additional capacity and
infrastructure

Source: Company , CEIC and Bloomberg


34
JCI By Sector – Banks
Key Drivers Key Risks

Splendid earning in 2010 and strong EPS growth in 2011 Risk of inflation and potential interest rate hike;
supported by sturdy loan growth;
Risk of NPL
Focus on high earning growth banks and improving cost-
income ratio; Regulatory Risk (Higher reserve requirement)

Waves of right issue.

Source: Company , CEIC and Bloomberg

35
JCI By Sector – Consumer
Key Drivers Key Risks
Select chief beneficiaries consumer stocks of higher Near-term inflation from basic food items;
disposable income;
Government’s phasing out fuel subsidies hurting
A young population, urbanization and democratization
disposable income;
remain potent drivers for the sector;

Prefer companies that have pricing power to pass on Soft commodity prices surge which if going for a long
increased costs term, force the profitability detriment of consumer
companies

Source: Company , CEIC and Bloomberg

36
JCI By Sector – Plantation
Key Drivers Key Risks

 Strong CPO prices due to drought in South


 Should there be a sharp contractions in global liquidity or
America and strength in other soft commodity prices;
US$ strength, CPO or other related commodity prices
 Oil-palm planters are set to book higher earnings in
could correct steeply;
2011, helped by higher FFB output and CPO prices;
 China’s price-control guidelines may lead to lower edible
 Expectation CPO prices (CIF) to rise 27% to
oil prices;
average US$870/tonne in 2010. For 2011, we forecast
Potential excessive IDR would send negative tone for
an average price of US$950/tonne
INDO CPO producer as it leads to higher local costs;

Source: Company , CEIC and Bloomberg

37
JCI By Sector – Property
Key Drivers Key Risks

Expectation of higher inflation and higher interest rate A key risk for the sector is project recognition;
may dampen sentiment towards the sectors;
Capital-raising is another risk for minority shareholder,
Earnings are major catalyst in property; equity markets are developers major source of funding;

Backed by a strong performance in 2010, 2011 is Regulatory Risk


expected to be backed up by earning acceleration and
strong presales

Source: Company , CEIC and Bloomberg

38
Valuation and Growth

Source: Bloomberg
As of 9 February 2011
39
Valuation and Growth

Source: Bloomberg
As of 9 February 2011
40
Valuation and Growth

Source: Bloomberg
As of 9 Februari 2010
41
Valuation and Growth

Source: Bloomberg
As of 9 February 2011
42
Growth per Emiten on 2010

43 Source : Bloomberg
Growth per Emiten on 2010…contd

44 Source : Bloomberg
Growth per Emiten on 2010…contd

45 Source : Bloomberg
Growth per Emiten on 2010…contd

46 Source : Bloomberg
LQ 45 2010 (+32.73%)

47 Source : Bloomberg
LQ 45 for Q4 2010 (+1.45%)

48 Source : Bloomberg
49
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