Citigroup advises switch to Asia's large-cap stocks

LOWER RISKS: The US firm said that large-cap stocks offer higher returns on equity, bigger margins and stronger cash flow than small and mid-caps


Fri, Aug 17, 2007 - Page 12

Investors should favor shares of Asia's largest firms given current stock-market volatility as their relative size and stability are likely to draw investors, Citigroup Inc said.

More than US$4.5 trillion in stock-market value has been erased worldwide since July 23, as concern about widening losses on US home loans prompted investors to shun equities.

The Morgan Stanley Capital International Asia-Pacific Index dropped 12 percent in that time, almost erasing its gains for the year, and benchmarks in the Philippines and Indonesia were the two worst performers among 89 global benchmarks tracked by Bloomberg.


"Greater uncertainty and higher volatility mean investors will lower their risk tolerance in favor of the trusted and tangible," Markus Rosgen, chief Asia strategist at Citigroup, said in research note yesterday.

"In short, large caps will be back in fashion," he said.

Over the past three years, "momentum investing" in shares with smaller capitalization has overshadowed a "value-driven" approach. That trend is coming to an end, Citigroup said.

Large-cap stocks have higher returns on equity, bigger margins and stronger cash flow than small and mid-cap stocks, it said.

Many investors have been trimming their holdings of riskier assets such as equities on fears global growth will slow because of a deepening housing crisis and widening losses on subprime debt in the US.

The Dow Jones Wilshire Asia Pacific Large Cap Index has lost 12 percent since July 23, while the Dow Jones Wilshire Asia Pacific Mid-Cap Index has declined 13 percent. The measure for large caps trailed the benchmark for mid-caps in all but one of the past four years.


Rosgen's recommendations in Asia, outside of Japan, include China Mobile Ltd (中國移動通信), the world's largest cellphone operator by users, and Henderson Land Ltd (恆基地產), a developer controlled by Hong Kong billionaire Lee Shau-kee (李兆基).

He also advised investors to pick up shares in Air China Ltd (中國民航), the world's biggest airline by market value; China Shenhua Energy Co (神華能源), the nation's largest coal producer; and Cnooc Ltd (中國海洋石油), China's biggest offshore oil producer.

In Taiwan, Rosgen favors Far EasTone Telecommunications Co (遠傳電信), the nation's third-biggest mobile-phone operator, and Formosa Plastics Corp (台塑), the world's second-largest maker of polyvinyl chloride.

Singapore's SembCorp Industries Ltd, Malaysia's Sime Darby Bhd and State Bank of India complete his top 10, the note said.

Also see story:
Asian markets fall to lowest in months