Remaining Calm Amid The Storm Rahul Chadha Co-Chief Investment - PowerPoint PPT Presentation

Remaining Calm Amid The Storm Rahul Chadha Co-Chief Investment Officer Mirae Asset Global Investments (HK) Limited

A-share market – Don’t Panic! Shanghai Composite Index Price Chart • Latest rally had little fundamental support 6,000 Shanghai Composite Index  06-07 rally was supported by strong GDP growth, 5,500 +150% -40% unlike the latest rally 5,000 4,500 4,000 • Despite having corrected by 40% in recent months, A- 3,500 share market is still over-valued 3,000 2,500 • A-share market is driven by retail investors, often 2,000 inexperienced and with a trading mentality 1,500 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 • Don’t panic over the Chinese A-share market Source: Bloomberg, 13 Jan 2016 A-share market in numbers Shanghai Composite P/E ratio vs. GDP growth 60 Shanghai Composite P/E ratio (12m trailing, LHS) China Nominal GDP growth (%, RHS) 25 portion retail investors in A-share market, vs. 50 85% 20% in HK 40 20 30 of retail investors in A-share market trade at 81% 15 least once a month, vs. 53% in US 20 10 ⅔ 10 more than 2/3 of China’s new investors didn’t attend or finish high school 0 5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg, Jan 2016 Source: CNBC, Mirae Asset, 9 July 2015 2 For Professional Investor Only. Not For Public Distribution.

Renminbi – trade weighted basket CFETS CNY Index • Need to look at CNY vs. a trade weighted basket of currencies, rather than CNY vs. USD 110.0 105.0 • CNY has depreciated by ~4% post Aug 2015 and has 100.0 been broadly stable vs. trade weighted basket 95.0 • China’s FX reserves still stand at US$3.3tn – risk of a 90.0 sharp devaluation is limited 85.0 80.0 • We expect CNY to be broadly stable vs. the trade 75.0 weighted basket, implying ~5% depreciation vs. USD this year Source: Bloomberg, 7 Jan 2016 China FX Reserves (US$bn) CFETS CNY Index vs. CNYUSD 108.0 6.00 CFETS Index CNY (RHS) 107.0 6.10 106.0 105.0 6.20 104.0 6.30 103.0 102.0 6.40 101.0 6.50 100.0 99.0 6.60 98.0 97.0 6.70 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Source: Bloomberg, Dec 2015 Source: Bloomberg, 7 Jan 2016 3 For Professional Investor Only. Not For Public Distribution.

Supply-side Reforms – Near term pain, Long term gain • China’s leaders focusing on supply-side reforms to revive economy • Accelerate overcapacity reduction in “zombie” industries  Raw materials and commodities industries such as steel, coal, cement, aluminum and glass  M&A the preferred route, as well as some bankruptcies  Unlikely to see massive factory closures and layoffs (like in late-1990s) • Banks will also bear the pain of reforms as bad assets surface • Near term pain, long term gain 4 For Professional Investor Only. Not For Public Distribution.

“Make in India” – Propelling India to the next orbit “Make in India” program • “Make in India” program aims to boost manufacturing share in GDP to 25% and create 100mn new jobs • India will need US$0.5tn in incremental investment to reach these goals – need to attract FDI • Government has initiated measures such as increasing FDI limits, streamlining approval process and improving ease of doing business Source: BofA Merrill Lynch, Jan 2016 India is 3 rd most preferred host for FDI according to the UN India total FDI Source: UNCTAD, MNE: Multi National Enterprises, BofA Merrill Lynch, Jan 2016 Source: DIPP, Ministry of Commerce and Industry, BofA Merrill Lynch, Jan 2016 5 For Professional Investor Only. Not For Public Distribution.

Infrastructure – Roads and Freight Corridor 360,000km of rural roads built under PMGSY • Dedicated Rail Freight Corridors (DFC) key to address logistics bottlenecks • Improved road connectivity is the most important factor for Rural India’s prosperity (which accounts for 50% of population) • With better roads, more remunerative and perishable products can be transported from production to demand centers Source: PMGSY, Min. of Rural Development, Credit Suisse Estimates DFC to improve logistics in West India Strong order flow in road projects 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - NHAI - BOT NHAI - EPC States & Others Morth & NHAI target Source: ADSEZ presentation, BofA Merrill Lynch Source: BofA Merrill Lynch, Jan 2016 6 For Professional Investor Only. Not For Public Distribution.

Unique ID (UID) ─ To Ensure Significant Savings & Financial Inclusion UID covers 55% of Population Subsidies have ballooned over last 5 years Monthly UID enrolment (LHS) Cumulative UID enrolment Enrolments to accelerate again post government approval Source: UIDAI, IIFL Research Source: GOI budget, IIFL Research Full roll out of UID enabled cash transfers can save 2ppt of GDP • UID key tool in PM’s Financial Inclusion plan, good progress with 87% of the country’s adults enrolled Potential % of Initiatives savings (Rs bn) GDP Aadhaar based transfer by Central • Provides a fool proof identity with biometric verification 350 0.35 government like IRIS / Fingerprint / Face Matcher Automation of delivery channels by Central 249 0.25 government • Payment bridges enable direct cash transfer, saving nearly 2% of GDP in leakage of subsidies Central government moving out of delivery 802 0.80 States replicating the Centre 600 0.60 • Financial inclusion for large rural population who borrow at 24% - 30% from moneylenders Total 2,001 2.00 Source: IIFL Research 7 For Professional Investor Only. Not For Public Distribution.

Benign Global Monetary Policy Valuations across different historic periods • Post December US interest rate hike, subsequent hikes to be measured. Europe, Japan, EMs a growth drag Avg PB MSCI Asia ex Japan PB PB at start PB at trough/peak thru period • USD strength equivalent to 100-125 bps of monetary Bubbles 2.30 (P) 2.91 2.49 tightening Normal 1.75 NA 1.83 Slowdown / Fears of Recession 1.79 (T) 1.50 1.70 • Asian economies are less vulnerable vs. Asia Financial Crisis and taper-tantrum in 2013 Recession 1.91 (T) 1.30 1.63 Financial Crisis 1.58 (T) 1.09 1.32 Normalization 1.26 NA 1.47 Current fwd P/E: 11.7x Current P/B: 1.25x Source: Datastream, UBS, Mirae Asset, January 2016 External Vulnerability Score (higher score indicate more vulnerability) 14 1996 Vulnerability Score 2Q13 12 Scoring method 1Q15 Factors Metrics 1 pt 2 pts 10 Current acct % GDP <-2.5 <-5.0 8 External balances BBOP % GDP <-1.0 <-2.5 6 Credit growth Excess credit growth since '09 >30% %60% 4 External debt % GDP >25% >40% FX reserves and FX Reserves % GDP <20% <10% 2 external funding position Short-term debt % FX reserves >100% >200% 0 Fiscal position Fiscal balance % GDP <-2.5% <-5.0% NPL ratio % >85% >110% Banking sector LDR (%) >85% >110% Source: Haver, CEIC, FactSet, MSCI, Goldman Sachs, Mirae Asset, July 2015 Asset valuations Valuation (12m fwd. PE) Z-score >1.0 >2.0 8 For Professional Investor Only. Not For Public Distribution.

Valuation MSCI AxJ Valuation and Subsequent 12-month return • Valuations remain very attractive in Asia Probability of Positive Return in subsequent 12 months • Price-to-Book at 1.25x – 1 standard deviation below long Average Return in subsequent 12 months term average 120% • Historically, investors stood high chance of achieving 100% positive returns in subsequent 12 months by investing at 100% these levels 89% 80% 73% 70% 60% MSCI Asia ex Japan Price-to-Book Ratio 60% 53% 3.0 45% 2.5 40% 30% 2.0 17% 20% 5% 1.5 3% 0% 1.0 -11% -20% 0.5 < 1x PB 1-1.25x PB 1.25-1.5x PB 1.5-1.75x PB 1.75-2x PB >2x PB '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bloomberg, Mirae Asset, as of Dec 2015 Source: Bloomberg, Mirae Asset, as of Dec 2015 9 For Professional Investor Only. Not For Public Distribution.

Portfolio Positioning – Good China vs. Bad China Asia Sector Leader Fund: 99% in “Good China” Good China Gaming, 1% Bank, 1% • Under-penetrated, less capital intensive Food, 1% Tourism, 2% • Sustainable economic moats Internet / e- Environment, • Healthcare, insurance, clean energy, internet / e-commerce, commerce, 2% 12% travel & tourism Telecom, 4% ASL Bad China • Well-penetrated, capital intensive • Low barriers to entry, weak pricing power Healthcare, 9% Insurance, 9% • Steel, cement, capital goods, banks Source: Mirae Asset, as of December 2015 Asia Great Consumer Fund: 100% in “Good China” Manufacturing vs. Service PMI 60 Others, 3% Manufacturing PMI Service PMI Food, 3% 58 56 Tourism, 3% Internet / e- commerce, AGC 54 21% 52 Healthcare, 6% 50 48 Insurance, 13% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Source: Bloomberg, Mirae Asset, as of November 2015 Source: Mirae Asset, as of December 2015 10 For Professional Investor Only. Not For Public Distribution.