Market views - Asia Pacific ex Japan

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Asia Pacific ex Japan

March 2010

Economy

The Far East region experienced strong positive growth in Q4 last year. Regional demand was the main engine of growth, led by China. Industrial output and export growth have gone back up to the trend level, especially in cyclical economies like Taiwan and Korea. Consensus estimates for the region’s GDP growth is 8.7% for 2010.

The collective easing of Far East’s monetary and fiscal policies has been the largest ever. Whilst this has been effective in stimulating the economy, inflationary pressure is building up across the region. This is especially the case in India and Vietnam. As such, real rates are expected to be negative in a number of the economies by middle of this year. Thus, a normalisation of monetary policy is likely to be undertaken by the regional central banks. A few countries have already hiked interest rates. Australia has put rates up 3 times since it recovered from the financial crisis. The other countries that have hiked rates are Vietnam, Malaysia and India. Prudent administrative tightening measures are likely to be pursued as well. This is the case with China.

In China, the central government controls credit growth, with credit quota set at 7.5 trillion renminbi for this year. But China has very high savings, with household deposits at 180% of GDP. Thus, any marginal movement of this stock of money has profound impact on the real economy, especially the property market. The expectation of high inflation has seen this money going into the property market. It is this flow of deposits and the property market that the central government is focussing on at the moment and hence the outlook of the property market defines economic policy in the near term. The government has introduced numerous administrative property tightening measures since the end of last year and this is beginning to have an impact on the underlying property market. Both property transaction volumes and property construction levels are trending down. With the central government cutting back on infrastructure investment this year, it is thus important to have a healthy and stable investment in the property sector in order to achieve at least 8% GDP growth. Hence, it is expected that the government will not introduce very harsh measures, but it will prefer gradual tightening in the near term, while at the same time promoting more domestic consumption growth.

While Asian central banks are controlling the pace of their respective currency appreciation, it is expected that these currencies will appreciate further. Renminbi appreciation will continue to dominate the headlines. While the Chinese central government has already indicated that it will resume flexibility in Renminbi this year (a managed currency against a basket of currency), the timing is unclear. The whole issue has turned into a political rhetoric with US. A mishandling of the whole issue can present downside risk to the market.

The market is trading at 13.8x forward earnings with 26% earnings growth for 2010 and is still considered fair value.

Page last updated April, 2010 ID1721