Market views - Asia Pacific ex Japan

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Asia Pacific ex Japan

April 2009

Economy

Economists continue to revise down their forecast for 2009 GDP growth. The range of forecast for the region is extraordinarily wide. Asian central banks have been busy forging economic cooperation among themselves through currency swaps. Japan, Korea, China and 10 South East Asian countries agreed to a pool of US$120bn foreign reserves to depend their currencies. Within individual economies, policy easing continued and more fiscal stimulus have been announced. In the external front, exports continue to fall.

In China there are signs that the economy is bottoming. Unlike the western world, banks in China are lending and liquidity is abundant. There is no balance sheet problem and no fiscal or political obstacles to stimulus packages announced. Industry specific stimulus packages were announced for 10 strategic industries and these are auto, steel, shipbuilding, electronics and IT, petrochemical, textiles, light industry, non ferrous metal, machinery and logistic. There is no crisis of confidence among consumers, after several years of strong income growth coupled with high savings. Consumer sentiment remains subdued but retail sales are very stable, and there is no household debt. An important indicator is auto sales, which grew 25% yoy in February. On the investment side, the strong Purchasing Manager Index rose for 3 consecutive months after hitting bottom in November 2008 (Nov 08 38.8 Dec 08 41.2 Jan 09 45.3 Feb 09 49.0). PMI new orders was 50.4, led by machinery on the back of government infrastructure projects. Urban fixed asset investment (proxy for gross fixed capital formation) grew 26.5% in first 2 months of 2009, fuelled by aggressive government spending. State Owned Enterprises control capital-intensive sectors, accounting 40% of urban fixed asset investment, under the direction from government, will continue with capital expenditure this year. Exports however, remained very depressed but net exports account for only 10% of GDP. During the National People’s Congress, the major targets for 2009 were set out: 8% GDP growth, budget deficit 3% of GDP, M2 growth 17%, loan growth 17%. Rural development and stimulating domestic demand are the most important tasks on hand: to expand consumption demand (subsidies); to maintain fixed asset investment growth; to promote healthy development of the property sector and to expedite earthquake reconstruction. Real estate is key to China’s economic recovery as it is a major contributor to investment and consumption. As such, more concrete measures from the government are expected to revive and promote the housing market. The key risk going forward is unemployment and that is Beijing’s biggest fear. There are 20m migrant workers unemployed; 1.5m graduates from 2008 could not find a job and 6m fresh graduates in 2009 are looking for a job. Hence, a proposal to create jobs costing 42 trillion RMB was announced. State Owned Enterprises have been told not to layoff workers but resort to cutting salary instead. The government still believes that it can achieve 8% GDP growth this year and it hinted strongly that it is prepared and has the options to do what it takes, should it need to. A temporary solution such as nationwide consumption vouchers is being considered.

Market volatility is likely to continue as there is no decoupling between Asian and global equity markets. While any negative news flows from Eastern Europe would affect market sentiment, positive developments in China would underpin sentiment in the region. The Chinese market is likely to recover first as its economy has the strongest fundamentals. Corporate earnings have been cut aggressively giving an attractive valuation of 10.0X forward earnings. Stock selection is crucial going forward.

Page last updated May, 2009 ID1721