Market views - Asia Pacific ex Japan

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Asia Pacific ex Japan

June 2010

Economy

The Far East economies grew strongly during Q1 of this year. Economies like China, Taiwan, Singapore, Malaysia and Thailand experienced double digit growth rate. Consumption and export growth was the main driver. This is likely to be the peak of the current cycle.

Inflationary pressure, whilst still under control, has started to build up in the region. A number of countries have taken pre-emptive measures and started to normalise their respective monetary policy, irrespective of what the US and Europe are doing. The Far East economic cycle at this stage is totally out of synch with that of the developed markets.

Australia has raised interest rates 6 times since the end of the crisis. This is beginning to impact the underlying economy. With households entrenched in debt and without a government handout this year, retail sales have started to slow. Malaysia and India have raised interest rates twice since the beginning of this year. Singapore on the other hand has revalued its managed currency up by 1%.

China and its policy remains the focus of attention. China has undertaken quantitative tightening post the massive stimulus package that it introduced at the end of 2008. The numerous administrative measures as well as 3 rounds of banks’ reserve requirement ratio hike have eventually given rise to a slowdown in economic activities, as seen in fixed asset investment, purchasing manager index and industrial production. China is adamant in controlling its property market bubble by implementing numerous property measures this year. While property transactions have fallen dramatically, the average selling price is yet to correct. Inflationary pressure is building up, as a result of food prices as well as a stream of wage rises. The minimum wage growth for many provinces has been set at around 20%. While May CPI at 3.1% looks benign, this underestimates the actual magnitude of inflation.

The EU debt crisis is complicating Chinese policies. The EU accounts for 25% of China’s direct exports and re-exports and it is the largest single market for Chinese exports. The 18% appreciation of RMB vs Euro means export weakness going forward. While this might mean that China may not accelerate on its tightening mode, it is not likely to ease now, as property prices have yet to correct and inflation is still above its target of 3%.

China announced it would reform the Renminbi exchange rate regime by assuming the official daily trading band of +/-0.5%. There will be no upfront one-off revaluation but the new regime will allow more flexibility. This move is likely to take the pressure off the US.

The market is trading at 11.7x forward PE as compared to 13.2x 5-year average, i.e. the market is cheap. However, the fallout of Europe if exacerbated would impact the whole region negatively.

Page last updated July, 2010 ID1721