Market views - Asia Pacific ex Japan

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Asia Pacific ex Japan

December 2009

Economy

The regional economies exhibited strong V shaped recovery in Q3 with better than expected growth rates. Forecasts of growth rates for 2010 have been raised for the region as a result. The concern in 2010 for the region is inflationary pressure and asset bubble. It is thus important to see how central banks in the region can deflate gradually. Apart from HK dollar and Chinese Renminbi, the other asian currencies have appreciated significantly. This raises the question of whether there will be capital controls going forward, especially after Brazil has imposed taxes on certain instruments. Monetary policies in the region will likely to be tightened ahead of the developed countries. Australia was the first country in Asia Pacific to hike interest rates (25 bp each on two separate occasions) and a number of Asian countries would likely follow suit in 2010. Vietnam hiked its rates by 100bp and the next one to follow is likely to be Korea, India and China in that order.

It is apparent that China has achieved the 8% GDP growth target that it was aiming for. Industrial production for October touched 16% and the forecast for November/December is 18%. The unprecedented level of Renminbi lending and money supply growth is inflationary, with M1 leading CPI by 7 months. China’s policy stance has changed from one of promoting growth to that of managing inflationary expectations. This means lower loan growth, more stringent capital adequacy ratio for banks, tighter mortgage control and property lending, slower money supply growth, less investment in heavy industries and more intensified government sterilization of excess liquidity in the open market. The flattening of the yield curve is signalling a tightening policy from the central government and this is set to continue as the economy continues to recover in Q1 next year. The massive influx of hot money into China has prompted the authority to tighten capital control at the margin. It is expected that Chinese Renminbi will resume a 3-5% appreciation throughout 2010. China has set up currency swap agreements with 6 countries to settle trade in Renminbi and it is in talks with 9 others to do the same. This is likely to be a long term trend. The one area that the Chinese government is keen to continue to promote is domestic consumptions. A number of policies have been put in place to that effect.

There has been a continuous influx of foreign capital into the region this year. This is especially inflationary for Hong Kong which runs a currency board. A massive bubble is likely to be in the making. Corporate have reported robust earnings recovery and analysts have been revising up earnings forecast. The consensus EPS growth for 2010 is 28% for the region. Domestic demand is likely to continue to recover strongly into 2010 and that is likely to be the main theme for the region going forward. The current market valuation is 14.4x 2010 earnings or 2.2x price to book, which is fair valued by historical standard.

Page last updated December, 2009 ID1721