Don't panic! It's not the beginning of a bear market -Asia Equity Focus

Asia to face temporary pullback rather than entering a bear market
Hit by a sharp resurgence of risk aversion across the globe, the Asian equity
markets tumbled in the last three trading days, with the MSCI Asia ex-Japan and
MSCI Asia Pacific indices falling 5.3% and 4.3% from their record highs on 24 July.
We expect the Asian equity markets will see further headwinds in the coming week
after the continued sell-off in the US equity market last Friday, driven by lingering
concerns about the spillover effects of the subprime mortgage fallout and a widening
credit crunch which will curb global M&A activities. The market has totally ignored
the stronger-than-expected US Q2 GDP estimate at 3.4%, above consensus of
3.2%. The Dow Jones and S&P 500 plunged 4.2% and 4.9%, respectively, over
the past week.
In view of the current hostile trading environment, we advise investors not to panic as
we see limited signs of the beginning of a bear market. In his just released global
equity strategy report, Credit Suisse Investment Banking (CSIB) Global Equity
Strategist, Andrew Garthwaite, argued that we do not have the preconditions for a
general credit crisis or the end of the equity bull market. According to Garthwaite, six
pre-conditions need to be in place for the equity bull market to end: (1) equities
become expensive against bonds; (2) corporates turn into net sellers; (3) a major
macro problem occurs; (4) excessive optimism; (5) credit spreads need to be in a
bear market; and (6) credit breadth narrows. At this stage, we only see two negative
signs emerging, which are the widening of credit spreads and narrowing of breadth.
Based on the experience of the narrowing of breadth in April 1998, the equitymarkets peaked nearly two years later. As a result, CSIB reiterated its bullish view on global equities though it saw risks for the
equity markets rising.
We share the views of CSIB that the latest market downturn is another bull market correction, though the magnitude of the
correction will likely be greater than the two earlier pullbacks that we saw in late February-early March and in early June. There
are three positive fundamental factors in support of continuation of the bull market to the year-end. First, equities are still not
expensive against bonds as equities FCF yield is still abnormally high against corporate bonds yield. Second, funds flow remains
attractive, as overall corporate buying and insider buying have risen strongly. Note that private equity inflows soared 67% to USD
260 bn in H1 2007 and CSIB estimated that there is still around USD 200 bn of un-invested private equity in the market. Lastly,
inflation remains benign, as wage inflation in the US, Japan and Europe is falling and non-food inflation in China continues to stay
low at 1%. We maintain our positive fundamental views on the Asian equity markets for H2 2007 and believe the near-term
correction will bring more attractive re-entry levels for long-term investors.