20081010-UBS-Asia Equity Strategy

G rizzly Bear
􀂄 Within 5% of the second-worst performance since 1973
The 55% fall in Asian equities since October 2007 makes this the fourth worst bear
market performance since the early 1970s. Valuations have now corrected
substantially. Our Aggregate Valuation Measure is now below 1998 levels. We
think the market is implying a decline in earnings of at least 27%. Even consensus
earnings forecasts are finally coming down (by 10% year to date).
􀂄 Credit conditions still hold the key
Money market conditions hold the key for Asian equities to rebound. Valuation is
not the catalyst for an end to a bear market.
􀂄 Country/sector preferences remain
We continue to avoid economic cyclicality and prefer rate sensitivity. Economic
conditions are likely to worsen before getting better, though rates are likely to keep
coming down. We like Financials, and Telecoms and are underweight Industrials
and Technology. At the country level, we prefer surpluses to deficits. We are
overweight Hong Kong, Singapore, China and like the latter for its reflation
potential. Our key underweights are India and Indonesia.