Executive Summary (Goldman Sacs)

QE tapering fears have sparked a corrective phase for Asian regional equity markets,

which have fallen over 11% from early May highs. Barring significant erosion in the

growth outlook, we gauge downside risk to be around 5%-8%, and view this selloff as

an opportunity to build positions. The recovery, however, is likely to be more muted

than is typically the case because markets need evidence of improving growth and

this will take some time. We focus on Korea, banks vs. defensives, and stocks that

tend to fare well during rising rate environments.



classes. Equities are off 11%, with selling most pronounced in ASEAN. Financials,

commodity cyclicals and defensives have fallen 10%-14%. Currencies have been

hit, notably AUD and INR. Bond yields have risen, especially Indonesia long rates.Widespread correction. The selloff in Asia has engulfed all markets and asset



mood. The principal catalyst is the back-up in US rates as investors price in the

eventual exit from QE. Lack of a growth offset is the second reason: Asian equity

markets are taking the ‘pain’ of higher US rates before they feel the compensating

‘gain’ of better growth. Heavy investor positioning, notably in ASEAN, is the third

factor, which has intensified the decline. The final reasons are external

vulnerabilities, such as current account deficits in India and Indonesia, and

contagion effects- both across asset classes and geographies.Drivers of the decline. We see five interlinked reasons for the shift in market



differences in the internal composition of this selloff compared to past corrective

episodes, and these have investment implications as we look forward into 2H2013.

In particular, North Asia has outperformed ASEAN, and domestic and global

cyclicals have fared better than defensives and rate plays.Different internals point to different responses. There are several important



regional equities at roughly 5%-8%. Valuations are low (11.2x 12-m forward P/E,

1.6x trailing book) and are close to past ‘minor’ correction lows. Foreign selling is

approaching levels that typify previous downturns. Earnings risk is moderate as

long as our macro outlook holds. Our 12-m target now implies 25% upside, driven

by low teen earnings growth and a moderate valuation recovery. Historically, 6-

12m returns have been strong from current valuation levels.Moderate downside risk favorable risk/reward. We estimate the risk for



recovery off the trough than typically occurs: markets need evidence of improving

growth and this will take some time. By market, we advocate accumulating Korea.

Thematically, we recommend banks vs. defensives, which is part of the dividend

cyclical area we favor. Stock-wise, we highlight ASEAN stocks that are

fundamentally sound and have been sold down too much, as well as a long/short

list of names that tend to do well/poorly in rising rate environments.Four tiers of implementation conclusions. Regionally, we expect a less dramatic

Executive Summary (Goldman Sacs)

QE tapering fears have sparked a corrective phase for Asian regional equity markets,

which have fallen over 11% from early May highs. Barring significant erosion in the

growth outlook, we gauge downside risk to be around 5%-8%, and view this selloff as

an opportunity to build positions. The recovery, however, is likely to be more muted

than is typically the case because markets need evidence of improving growth and

this will take some time. We focus on Korea, banks vs. defensives, and stocks that

tend to fare well during rising rate environments.



classes. Equities are off 11%, with selling most pronounced in ASEAN. Financials,

commodity cyclicals and defensives have fallen 10%-14%. Currencies have been

hit, notably AUD and INR. Bond yields have risen, especially Indonesia long rates.Widespread correction. The selloff in Asia has engulfed all markets and asset



mood. The principal catalyst is the back-up in US rates as investors price in the

eventual exit from QE. Lack of a growth offset is the second reason: Asian equity

markets are taking the ‘pain’ of higher US rates before they feel the compensating

‘gain’ of better growth. Heavy investor positioning, notably in ASEAN, is the third

factor, which has intensified the decline. The final reasons are external

vulnerabilities, such as current account deficits in India and Indonesia, and

contagion effects- both across asset classes and geographies.Drivers of the decline. We see five interlinked reasons for the shift in market



differences in the internal composition of this selloff compared to past corrective

episodes, and these have investment implications as we look forward into 2H2013.

In particular, North Asia has outperformed ASEAN, and domestic and global

cyclicals have fared better than defensives and rate plays.Different internals point to different responses. There are several important



regional equities at roughly 5%-8%. Valuations are low (11.2x 12-m forward P/E,

1.6x trailing book) and are close to past ‘minor’ correction lows. Foreign selling is

approaching levels that typify previous downturns. Earnings risk is moderate as

long as our macro outlook holds. Our 12-m target now implies 25% upside, driven

by low teen earnings growth and a moderate valuation recovery. Historically, 6-

12m returns have been strong from current valuation levels.Moderate downside risk favorable risk/reward. We estimate the risk for



recovery off the trough than typically occurs: markets need evidence of improving

growth and this will take some time. By market, we advocate accumulating Korea.

Thematically, we recommend banks vs. defensives, which is part of the dividend

cyclical area we favor. Stock-wise, we highlight ASEAN stocks that are

fundamentally sound and have been sold down too much, as well as a long/short

list of names that tend to do well/poorly in rising rate environments.Four tiers of implementation conclusions. Regionally, we expect a less dramatic