Asia equity: Short term gain, long term pain

•  The unresolved global debt crisis continues to hold Asian equities hostage. As investors grapple with fears of further deterioration in Eurozone conditions, Asian markets are likely to remain cheap, and therefore tempting to the bargain hunters.
•  Given that many were caught off-guard by the powerful Q1 rally, investors will remain watchful of Eurozone developments, and attempt to get ahead of a potential "risk-on" rally. Such bold attempts will be made more challenging by the uncertain growth outlook for the US and China
•  Until we reach a "capitulation" phase in current market conditions, we believe any risk-on rallies will be short lived. Such rallies are becoming more difficult to trade given their short duration and with opportunities limited to very high beta stocks. Taken together, this translates to lower
risk-adjusted returns for short term trades.
•  Investors should be realistic about returns and focus on dividends and domestically-driven growth in core portfolios. Portfolio protection looking at price to book valuation as a support for downside risks maybe the way to achieve outperformance.
•  We are overweight on Thailand, Indonesia and Singapore as we have more confidence about their downside protection capabilities. In contrast, risks in India and Malaysia remain high and we are underweight in these two countries. Hong Kong/China, Taiwan and South Korea lack drivers for a breakout as long as uncertainties remain.
China policy stimulus is the main risk and hence we are neutral in these markets.