Market views - Asia Pacific ex Japan

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Asia Pacific ex Japan

September 2008

Economy

The region: economic slowdown gathered pace

  • Much weaker Q2 GDP growth across the region.
Q1 GDP Q2 GDP 2009 f GDP
China 10.6 10.1 8.7
Hong Kong 7.1 4.2 4.5
Singapore 6.7 2.1 3.6
Malaysia 7.1 6.3 4.5
Thailand 6.0 5.3 4.6
Indonesia 6.3 6.4 4.8
Korea 5.7 4.8 4.2
Taiwan 6.1 4.3 3.6
Philippines 5.2 4.6 4.8
India 8.8 7.9 8.6
Australia 3.6 2.7 2.2
  • A very sharp slowdown in export growth which is expected to continue as European growth slows further.
  • Persistent inflationary pressures as a result of high oil price and food prices taking a toll on spending power.
  • Domestic demand has not been able to totally offset external slowdown.
  • Negative wealth effect from a weak and falling stock market.
  • Belt tightening is the order of the day despite much stronger economic fundamentals, healthy corporate balance sheets and liquid household finances.
  • Monetary policy for a number of economies in the region such as Thailand, Indonesia, Philippines, India and Korea is likely to remain tight.
  • On the other hand, most of the economies in the region have strong fiscal balance sheet, with the exception of India. Additional fiscal stimulative package is thus a possibility for a number of the economies.
  • A number of economies have problems with the incumbent government: Thailand, Malaysia, Korea and Taiwan. This is likely to affect economic policies and stock market performance.
  • China, a command and inward looking economy with the ability to ease policy is thus likely the safest macro bet in the current economic slowdown and uncertainties

China: economy policy at turning points

  • The economic slowdown is across the board and is a lot more severe than the Chinese authority expected – retail sales, industrial production, fixed asset investments, loan growth, purchasing managers' index have all slowed significantly. The closures of small and medium size enterprises, many of them export related and property related shot up significantly. Many others are facing financial stress as they are not able to obtain credit.
  • With inflation having fallen from 8.7% to 4.9%, the authority has finally taken note of the fact that monetary policy has remained too tight for too long.
  • Subsequent to a series of high level economic policy meetings, the Politburo issued a report indicating policy change: to ease policy in order to stimulate the economy so as to mitigate the downside risks.
  • The top priority is set to refocus on generating economic growth, to promote domestic demand and consumption
  • A series of easing policies were proposed and many were acted upon immediately, including expanding lending quotas to small and medium sized enterprises, export VAT rebates for certain industries, broadening of financing options for property companies, a slowdown in renminbi appreciation.
  • 1-year lending rate was cut by 27 bps and reserve requirement ratio for small banks was cut.
  • Other fiscal stimulative measures are expected to be implemented over time, including tax cuts and personal tax allowance increases, investments in railway, infrastructure, agriculture and post-quake reconstruction.
  • While more measures are likely to be discussed during the Party Congress in October, the risk is the authority might be slow to act on them as the economy slips further into slowdown.

Markets

  • The sentiment of the markets in the near term is likely to remain subdued, as investors worry about global slowdown and its knock on impact on Far East economies.
  • Those markets whereby policy makers are able to reflect economies are likely to perform better.
  • Corporate earnings forecasts have been consistently revised down throughout this year and are now a lot more conservative than a year ago.
  • The current market valuation of 10.4X forward earnings is compelling, as compared with its long term average of 13.4X.
  • Going forward, market volatility is likely to remain high in the current environment.

Outlook

In terms of growth outlook and economic fundamentals, Far East is a lot better than the developed economies. However, with no end to the credit crunch in the West, investor appetite for risk and emerging markets is reduced. This is likely to continue to curtail performance of the Far East equities.

Page last updated October, 2008 ID1721