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Asia is poised for V-shaped recovery next year

Posted by luxuryasiahome on December 3, 2009

ASIA is poised for a sharp economic recovery next year, even as developed economies in the West continue to struggle, according to Standard Chartered’s chief economist.

‘Our forecasts suggest the recovery will take the shape of an L or a U in the West and a V in the East,’ Gerard Lyons, who is also the group’s head of global research, says in a report published yesterday.

But open and export-dependent economies – Singapore, Hong Kong and Taiwan – are likely to grow below trend, due to sluggish exports to major markets in the West, the report says.

In Asia, growth will be centred on China, India and Indonesia, which have large domestic markets and relatively closed economies that cushion them from external shocks.

Overall, ‘2010 is likely to be the year of global recovery’, Mr Lyons says. ‘A double-dip recession would require either an external shock – most likely an event that drove oil prices sharply higher, such as an escalation of tension with Iran – or a policy-induced shock triggered by premature policy tightening in the West.

‘We are not predicting a double-dip, although we would not be surprised if a number of economies witnessed a negative quarter of growth at some stage.’

But even as Asia leads the global recovery, ‘we continue to stress the need to focus on levels’ – the dollar value of goods and services produced – rather than just growth rates, Mr Lyons says.

In 2008, the world’s economic output, measured by gross domestic product, was US$60.9 trillion, with advanced economies including the US, Japan, Germany, France and the UK accounting for more than half of global output, according to International Monetary Fund data.

‘If the West is not booming, the world will not boom. And the West is not going to boom,’ Mr Lyons says. ‘The US consumer, the key driver of the global economy for some time, faces a difficult outlook.’

He expects the world economy to grow 2.7 per cent next year, after shrinking an estimated 1.9 per cent this year.

Asia’s economic output is projected to expand 7 per cent in 2010, faster than this year’s estimated growth of 4.5 per cent.

Its biggest economic growth engines, China and India, are expected to expand 10 per cent and 7.5 per cent, respectively, compared with 8.5 per cent and 6.8 per cent in 2009.

Source : Business Times – 3 Dec 2009

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What’s in store next year

Posted by luxuryasiahome on December 1, 2009

Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features in 2010

ASIA is rapidly approaching the end of its sharpest V-shaped recovery on record. It’s been quite a ride on both sides of the trough: two quarters of double-digit GDP contraction for most countries (ending in 1Q 2009), followed by two quarters of double-digit expansion. We are now halfway through the second of the upside quarters with Singapore, China and Korea having reported double-digit growth rates (in q-o-q, seasonally adjusted terms) in 3Q 2009. Malaysia, Thailand and Taiwan will likely report similar numbers over the next two weeks.

If the end is nigh – and it is – let’s not rush there just yet. There’s plenty of time to prepare for what’s coming and there’s little to fear anyway. Let’s first take a minute to consider how extraordinary the recovery has been. One way to get a sense of it is to look at Singapore.

Back in January, most government and private sector professionals expected to see a 2.4 per cent contraction in the Singapore economy in 2009. By May, those expectations had plunged a full five percentage points to an alarming -7.5 per cent. But only five months later, in October, expectations were right back where they were at the start of the year: to a contraction of 2.6 per cent. That’s how convincing the downward head fake was, that’s how sharp the V-shaped recovery was. We all would have come closer to the truth if we had left our 2009 forecasts untouched back in January.

Naturally, the ‘thought leaders’ who led consensus in predicting Armageddon in the first half of the year had more backtracking to do later on. One lesson they and everybody else learned this year is that it’s not about being ‘ahead of the curve’; it’s about being right at the end of the day. Not many were this year.

For Asia overall, the roller coaster was almost as wild as it was in Singapore. Industrial production – Asia’s economic backbone – peaked in the summer of 2008; not surprisingly, just before the Beijing Olympics in August. But the downturn continued with the collapse of Lehman Brothers in September 2008 and by January 2009, industrial production in the Asia-9 had fallen by 14 per cent. That’s twice the drop that occurred during the financial crisis of 1997/98 or the high-tech global recession of 2000/01.

Not surprisingly, exports led the collapse on the demand side of the GDP equation. In US dollar terms, Asia’s exports dropped by 40 per cent between July 2008 and January 2009. Like the drop in industrial production, the export drop was twice as big as what occurred during the global tech recession of 2000/01 and four times bigger than the export contraction in 1997/98.

What continues to surprise is that Asia’s export collapse had almost everything to do with China and almost nothing to do with the US, either directly or indirectly. Between July 2008 (when exports peaked) and January 2009 (when they hit bottom), Asia-8 exports to China fell by 45 per cent. To the US they fell by less than half that, or 21 per cent.

But the percentage drops don’t tell the real story, because China is a bigger buyer of Asia’s exports than the US. And it’s the dollar changes that make or break a business. In revenue terms, Asia-8 exports to China fell by US$111 billion between July 2008 and January this year. To the US, they fell by US$27 billion. In other words, in the revenue terms that matter, the export shock delivered by China was four times greater than the shock delivered by the US.

This explains why the countries hit the hardest were those with the closest links with China. And it helps explains why Asia was able to bounce back with no help from the US.

And bounce back it did. Exports and industrial production hit bottom in January and by July, Asia’s industrial production had fully recovered its pre-crisis levels. Six months down, six months back up – the very definition of ‘V’. By September, though, output had advanced another 2-3 per cent. So it’s no longer just a V-shaped recovery. We’ve passed that. Now it’s a V+.

V, V+, no matter. What is so amazing, to some, is that Asia pulled it off with no help from the US. Think about it: Asia’s industrial output recovered to pre-crisis levels by July while US imports turned north only in June. It’s a big deal. But is it really so surprising? Not when you remember that Asia’s export collapse was related to China, not the US.

Moreover, it isn’t the first time this has happened. Back in 2000/01, Asia beat the US in getting out of recession by a good four months. This fact – and the reasons behind it – is what allowed DBS to say, way back in December last year, that Asia would pull the same trick this time, but even more forcefully. This was when everyone else was saying that Asia would have to wait for the US to recover before it could.

Times change, and the biggest change underway in the global economy today is how much Asia contributes to global growth each year relative to how much the US does, or did. This structural shift – it’s been going on for 20 years and will go on for the next 20 – explains much of why Asia was able to pull off the V-shaped recovery with no help from the US.

The question now is, will Asia’s double-digit GDP growth continue? The answer is, of course not, for any of a thousand reasons. Double digit growth will soon give way to sideways movement in output levels. Asia’s V-shaped recovery will turn into a ’square root’ shaped recovery: that is, a sharp drop, a sharp rise, and then a palpable turn sideways.

When will Asia hit the kink in the square root sign? Probably by the end of the year or early 2010. In terms of GDP growth, Asia will experience a second quarter of double-digit growth in 3Q 2009 that should drop to high single-digits (6-8 per cent) in the fourth quarter. By 1Q 2010, growth should be back to normal.

Three things will constrain growth very soon: demand, supply, and policy. On the demand side, growth is running at double-digit rates now only because it fell at double-digit rates earlier on. What Asia is experiencing is the snapback from a series of four to five one-off events in late 2008 that included, perhaps most notably, the shock from the collapse of Lehman Brothers in September 2008. That sharp downturn had a bottom. The sharp upswing will have a top. With speeds on both sides of the ‘V’ about equal, the upswing will last for as long as the downswing: two quarters. But only as long as the downturn, because the upturn is nothing but its flipside.

And if demand does manage to surge for longer, there’s the supply side to contend with. Output can grow as fast as demand does when there is excess capacity, as there is today. But with demand soaring back, excess capacity will soon vanish. And once demand hits the brick wall of capacity constraints, output can grow only as fast as those walls can be moved.

Finally, policy will have a hand in slowing growth, and probably sooner than most imagine. Because once excess capacity is exhausted – and it will be by year-end – double digit demand growth starts to imply double digit inflation in most countries. That’s too high. Policies will change.

Throughout Asia, monetary tightening will be a key feature of 2010, with higher interest rates and stronger currencies expected to share the burden about equally. In general, we expect tightening will begin in earnest around 2Q 2010, with a few exceptions. On the tighter side, Korea and India will move sooner, probably in January or February. On the slower side, Thailand seems unlikely to tighten until the third quarter.

For Asia overall, much will depend on China, where we expect rate hikes and currency appreciation to begin in 2Q 2010. We look for the benchmark one-year lending rate to rise by 81 basis points (to 6.12 per cent) by the year-end. We also expect the yuan to resume its appreciation vis-a-vis the US dollar in 2Q 2010 and to strengthen to 6.61 per dollar by the end of 2010. This will set the stage for currency appreciation elsewhere in Asia, allowing other currencies to rise more comfortably than if they went solo. Asia’s currencies have risen by 6-7 per cent on average against the dollar since the start of this year and we expect to see another 6-7 per cent appreciation by the end of 2010.

Other things being equal, currency appreciation and higher interest rates will help cool regional economies and keep a lid on imported inflation as well. The trouble is, higher rates and the prospect of local currency gains have the tendency to attract foreign inflows. And inflows have the tendency to wreak havoc with the best laid monetary plans. They drive interest rates back down and push currencies further north than authorities might have wanted. Raise interest rates again and you just get another round of inflow: Asia-vu.

The only ’solution’, if you can call it one, is to control inflows. Nobody likes controls and for good reason. They are clumsy and messy and have the awful tendency to change from week to week. But they do afford central banks a greater ability to control interest rates and currencies at the same time. And for this reason the controls debate always comes back when inflows are pounding on the door. Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features of Asia in 2010. Capital inflows and another debate over controlling them seem likely to be two more.

DAVID CARBON – MD, Economics & Currency Research, DBS Bank Ltd

Source : Business Times – 1 Dec 2009

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Asia at risk of asset bubbles:Fosler

Posted by yeshomes on September 12, 2009

THE president of a prominent US research group has joined the growing ranks of economists warning against escalating asset prices in Asia.

The huge fiscal stimulus packages and flush liquidity set ‘the stage for asset bubbles to move out of the United States and into Asia’, said The Conference Board’s Gail Fosler at the CapitaLand International Forum yesterday.

Asia needs to keep a close eye on this risk, she emphasised. ‘Valuations at which acquisitions are made, at which underlying business investments are made, these acquisition prices are going to be almost generically extremely high, and I think this is going to pose a significant business challenge.’

Several economists have cautioned against potential speculation in the region’s equity, real estate and commodity markets after governments turned to fiscal stimulus and looser monetary policy to counter the downturn. Bank of China’s vice-president Zhu Min also said this week that liquidity could be heating up these markets.

Observers are training their attention on China, where property prices have risen rapidly on the back of record lending and growing optimism. Home prices in the country’s 70 biggest cities went up one per cent year-on-year in July, and again by 2 per cent year-on-year last month.

Property prices increased even as business sentiment in the real estate sector stayed weak, Ms Fosler pointed out. ‘There is just a huge amount of money floating around in the international marketplace seeking a home.’

The Chinese government – which pushed out four trillion yuan (S$832 billion) in stimulus measures and aggressively extended credit – is unlikely to tighten policies soon, said Nanyang Technological University economics professor Tan Kong Yam.

Technocrats in the People’s Bank of China and China Banking Regulatory Commission may be inclined to do so to avoid resource misallocation and more non-performing loans, he said. But he believes that they will be overruled by politicians who are more concerned about creating jobs and maintaining stability.

Policy tightening in China is likely to be ’slightly behind the curve’, Prof Tan said, projecting an increase in the reserve requirement ratio in Q4 this year and a hike in interest rates only in early 2010.

China’s economic performance will have wide-reaching impact. Prof Tan noted that Hong Kong, Taiwan, Australia and Korea are regions with the highest level of dependence on the Chinese growth engine. The Conference Board’s Ms Fosler even commented that China influences Asia’s growth more than the US.

Globally, economic growth rates will fall to a more ‘reasonable’ level after the crisis, Ms Fosler said. While they will be much lower than the rates achieved during the booming period of 2004-07, they will not be too far below those seen over a longer period of 1996-2006, she explained. ‘The new normal is in some sense the old normal.’

She also believes that US consumers will become more frugal and save more as their income expectations fall. But a contrary view came from another speaker at the forum, DePaul University professor James Shilling, who expects savings to fall should governments raise taxes to make up for higher budget deficits.

Source : Business Times – 12 Sep 2009

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Making sense of the recent market rally

Posted by luxuryasiahome on August 15, 2009

One important reason for the bullishness is that the market has already discounted much of the bad news

RECENTLY, one of my clients told me he was confused about the significance of the recent market rally. Many of the blue chips such as Singapore Airlines, NOL, SGX and CapitaLand are still making quarterly losses. On top of that, some 47 companies listed on the Singapore Exchange have announced quarterly results with combined earnings lower than the previous quarter.

On the job front, unemployment is still rising. According to the manpower ministry, the worst is not over yet. This is the first time employment has contracted for two consecutive quarters since the 2003 economic downturn.

GDP for 2009 is expected to contract by 4 per cent to 6 per cent. ‘Aren’t all these bad news for the stock market?’ he asked. Over the last four months, equities have done extremely well with the Dow Jones Industrial Average up 20 per cent; the Standard and Poor’s 500, 23 per cent; and the Straits Times Index (STI), 56 per cent.

Our property market has also picked up with queues forming outside some new show flats. HDB resale flat prices have surged to a record high which prompted the minister of national development to caution that speculation is creeping back into the market.

What is going on? Why is the stock market going up when the economy is still struggling? Who are buying these homes in a recession? Is it the start of an economic recovery and is the worst behind us?

Singapore’s latest export data support indications that we are recovering from its deepest recession to date. Non-oil domestic exports (NODX) fell 11 per cent in June from a year ago, compared with a 12.3 per cent decline in May.

At times like this, even a slight rebound makes things look better than they are, not forgetting that the Singapore economy is expected to grow only 3.5 per cent in 2010. So why is the stock market looking bullish despite weak economic data?

The answer comes from legendary fund manager Mark Mobius and billionaire investor Warren Buffett. Both of them believe that the stock market is a leading indicator of the state of the economy. In other words, it predicts what the economy will look like in six to nine months.

I’m no economist, but I’ll share a few of my observations. The unemployment rate may be high, but it is a lagging indicator of economic activity. From past recessions, unemployment keeps rising even after an economic turnaround begins.

Singapore’s gross domestic product (GDP) fell hard in the first quarter of 2009 and was followed by large numbers of layoffs. Neither of these statistics is good news. These numbers suggest that deflation could be on the horizon. Deflation or falling prices during a recession is a troubling sign and could lengthen the recession but this does not seem to be happening.

On the property front, Singaporeans’ keen interest in property doesn’t fade even in a recession. Currently, there is plenty of liquidity and mortgage rates are relatively low. So, many are looking to buy property to take advantage of the low interest rate environment. There were reports that the private property market is well supported by HDB upgraders who only need to pay a little more to upgrade as HDB resale prices are also rising.

One important reason for the bullishness is that the market has already discounted much of the bad news. Major indexes fell more than 40 per cent last year. But this doesn’t mean the market will ignore all bad news. Unexpected news can still take the market lower. Currently, the market is responding to what the economic landscape is expected to look like in six months. As such, I believe there’s a good chance that the market is beginning a bottom-building process.

Keeping in mind that the stock market looks ahead by six to nine months, the revelations of the past year have long been digested by the market. This was also true during the Asian financial crisis when the STI fell to a low of 800 points in mid-1998. It was all doom and gloom and a few months later Singapore was in a technical recession, coupled with massive job losses and poor corporate earnings.

Stockmarket behaviour can be a sign of things to come, particularly the economy. The question here is whether we believe that the fundamentals have improved enough to merit a 9,000 in the Dow Jones, or a 900 in the S&P 500 or even a 2,600 on the STI. In other words, are stocks fully valued at this time?

For a sustained rally, there has to be real earnings growth or positive earning surprises, improving home sales, higher employment, proof that inflation will not be a major problem down the road. Until positive data becomes consistent, we can expect the markets to start and stop, go up and down with an upward bias. If the data worsens, then stocks will once again retrace their downward spiral, maybe even hitting previous lows.

In my 20 years of practice, most successful investors I know tend to focus not so much on today. What is expected to happen tomorrow is more important. In the short term, the market is unpredictable and subject to great volatility. But in the very long term, the stock market has had a strong upward bias. I don’t know of any reason to think that that would change. This is a key point that’s easily overlooked in investors’ frantic search for the direction and the ‘right’ answers that they hope will yield instant gratification.

Personally, I believe that brighter days are ahead and that, someday, most of us will look back on the past two years as a very painful period that we managed to get through. Getting to that future won’t be easy, but it will be a lot easier for people who can keep their heads when others seem to be losing theirs.

Ben Fok
CEO, Grandtag Financial Consultancy (S)

Source : Business Times – 15 Aug 2009

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Swings in liquidity flows set to continue

Posted by luxuryasiahome on August 10, 2009

IN THE face of the continuing economic slowdown affecting developed economies such as the United States and Japan, the soaring financial markets around the globe present a big puzzle.

Stock prices across the region have hit 12-month highs, clawing back the losses sustained in the fallout from the collapse of US investment bank Lehman Brothers. The property market has turned sizzling hot as well.

Yet, this financial mini-boom sits oddly, with tell-tale signs of the recession that still ravages Asian economies.

Last week, disk-drive maker Seagate said it is axing 2,000 workers from its Ang Mo Kio plant as it relocates some of its operations to other countries.

But try telling house-hunters that Singapore is still mired in recession. They were more worried about a further surge in prices as they rushed head-long into the Optima condo project next to Tanah Merah MRT station, snapping up all its 297 units within three days last week.

Some suburban condo projects such as the Centro Residences in Ang Mo Kio have also been commanding prices of more than $1,100 per sq ft – a price which is usually associated with the prime Orchard Road area.

But the exuberance is not confined to Singapore. Other Asian financial centres such as Hong Kong, Seoul and Shanghai are experiencing similar surges in asset prices – both in terms of stock and real estate.

Much has been written in the Western media about the rising jobless rates in the US, despite last Friday’s report of a slight fall in numbers, and in Europe. The theory is that this is dampening consumers’ demand there as they tighten their belts to save more and become more frugal in their spending habits.

Since Asian countries rely on exports for their growth, the argument goes that unless the US and Europe start to grow again, Asian economies are unlikely to experience a turnaround as well.

But this fails to explain the surge in stock prices, suggesting, at face value, the emergence of a robust V-shaped recovery for the region as it puts the global financial crisis firmly behind it.

The usual line of explanation from analysts is that Asian economies, led by China, have successfully de-coupled from the West.

A growing appetite for more of everything – from commodities to financial services – from China would take up the slack caused by falling demand in the West, so the argument goes.

Then there is the theory that as the financial markets emerge from the biggest credit crunch in decades, the higher prices simply reflect a return to normal, after being beaten down to bargain-basement levels at the start of the year.

Still, the most plausible explanation for the recent surge in asset prices is the sloshing around of ‘excess money’ created by central banks in their zest to unclog the global financial system and arrest any further economic decline.

Since March, the US central bank has been on a programme to buy US$300 billion (S$430 billion) worth of US government bonds and US$1.25 billion of mortgage-backed debts.

Last week, the Bank of England upped the ante by announcing it would be buying a further &pound50 billion (S$122 billion) in gilts, or British government bonds, after exhausting its original budgeted purchase of &pound125 billion.

While the original intention of the two central banks was to bring down borrowing costs and ramp up spending in their respective battered economies, it hardly comes as a surprise that some of this money is finding its way to Asia, where it is fuelling a stock market boom.

The problem is exacerbated by the ability of traders at investment banks to get access to cheap US dollar funding, as the Fed has slashed interest rates to almost zero to fight deflationary pressure caused by the fall in consumer spending.

With the greenback weakening against Asian currencies, traders also stand to make a bundle from foreign exchange gains as well, with their huge positions in regional equities.

This has produced a situation similar to that seen 10 years ago when speculators borrowed heavily in Japanese yen to make huge bets in emerging markets after Tokyo cut its interest rates to zero to fight economic stagnation.

The picture becomes still murkier when you consider the flood of money pouring out of China from the liquidity generated by the lending made by Chinese banks to jump-start the economy.

As Morgan Stanley recently noted, Hong Kong equities – and, by extension, those in the rest of the region – could be ’squeezed up’ by mainland players and global investors all making a beeline for them at the same time.

So what can investors in small, open economies such as Singapore do as the collision of vast streams of liquidity cause wild swings in asset prices?

It is not surprising to find some ordinary investors throwing caution to the wind by snapping up newly launched condos or by diving deep into the stock market, even though the outlook for most businesses may still look murky.

But with global demand still weak, unemployment rising and MNCs still experiencing over-capacity in production, the likelihood is that consumer price inflation might stay low for now.

This may, in turn, mean that major central banks like the Fed and the Bank of England will not raise interest rates any time soon, or reverse course in their efforts at printing money.

For the stock market, there will be no respite from the dramatic price swings that have bedevilled equities since the US sub-prime mortgage crisis erupted two years ago.

After rising almost non-stop for three weeks, the benchmark Straits Times Index fell four days in a row last week.

Traders will have no choice but to learn to ride the wild swings produced by the ebb and flow of money as it washes through the region. Vast fortunes will be made – and lost – before the global economy begins to regain its poise.

Source : Straits Times – 10 Aug 2009

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Asian recovery looks to be on track: ADB

Posted by luxuryasiahome on July 24, 2009

S’pore growth for 2010 forecast at 3.5%, and the rest of Asean 4.2%

ASIAN economies appear to have turned the corner from the global recession and should be able to double next year the anaemic growth rates they are expected to post in 2009, the Asian Development Bank (ADB) said yesterday. But it warns in its latest Asia Economic Monitor that the road to full recovery is strewn with hazards.

The biggest single threat to continuing recovery identified by ADB report is the danger that recession in the US and Europe, on which Asia relies heavily for export markets, will last longer then generally expected.

Singapore’s GDP growth rate is forecast by the report to reach 3.5 per cent in 2010, after an expected overall contraction of 5 per cent this year. The rest of Asean should recover from marginal growth of 0.7 per cent this year to 4.2 per cent expansion in 2010, ADB says.

China remains the region’s star performer, with growth expected to be maintained at a relatively high 7 per cent this year, rising to 8 per cent in 2010. Japan, on the other hand, is forecast to suffer a 5.8 per cent GDP contraction this year and recover to just 1.1 per cent growth in 2010.

South Korea and Hong Kong are forecast to recover to respective growth rates of 4 and 3 per cent in 2010 after sharp contractions this year, but Taiwan will remain one of the laggards of the region with growth recovering only to 2.4 per cent next year.

Recovery got under way in Asia during the second quarter of this year, the ADB report notes, fed largely by fiscal and monetary stimulus programmes. But while exports are showing some recovery as a result of inventory adjustment, underlying external demand remains weak.

Among the positive signs for Asia are ‘early indicators that the pace (of economic contraction) slowed in the second quarter of 2009′, while balance of payments positions have ‘turned positive’ again, stock markets have rebounded, several currencies have begun appreciating and inflation has eased.

Meanwhile, the region’s banking systems ‘appear capable of weathering the economic storm’, ADB says, ‘with prudential indicators strong and lending continuing to grow’ across much of the region.

Despite these positive indications, the report says: ‘The overall external environment for emerging East Asia remains difficult and uncertain, with the recession in advanced economies continuing and global financial conditions improving (but) still tight.’

Emerging East Asia – which excludes Japan and the newly-industrialised economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore – ‘could see a V-shaped recovery’, with growth dipping sharply in 2009 before recovering next year to its pace in 2008.

But this scenario could change for the worse if there is a more prolonged recession than forecast in advanced economies, with export demand remaining depressed longer than expected. Premature fiscal or monetary tightening could also damage the prospects for a V-shaped economic recovery in Asia.

And falling inflation could turn into deflation in some economies of the region, says ADB, noting that Singapore and Taiwan, whose economies have contracted most sharply among the NIEs in the current recession, have been ‘experiencing deflation over the past few months’.

Given the tentative nature of the expected recovery, ‘it is critical that authorities stay the course in supporting domestic demand and growth’ through fiscal and monetary stimuli, the ADB report adds.

Source : Business Times – 24 Jul 2009

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Worst seems to be over for Asia, says Hng Kiang

Posted by luxuryasiahome on July 16, 2009

Minister’s remarks come ahead of Apec meeting

The worst may seem to be over for economies across Asia, but a recovery in trade will be some way off, said Trade and Industry Minister Lim Hng Kiang.

‘We don’t expect trade flows to be restored to previous levels . . . until the later stages,’ he told reporters yesterday, noting that trade tends to contract far more sharply than the general economy in a downturn.

He was speaking ahead of a two-day meeting here next week of Asia-Pacific Economic Cooperation (Apec) trade ministers. The meeting is one of several in the run-up to the main Apec ministerial conference in November which Singapore – as the current chair of the 21-member group – will be hosting.

The Apec trade ministers will review their responses to the economic downturn and see what else can be done to spur recovery. Another key job is to ensure – as far as possible – that protectionism does not rear its head and further impede trade.

It’s ‘very natural’ that domestic pressures to protect local industry and save jobs mount during a downturn, Mr Lim said.

But Apec leaders at their Lima, Peru summit last year had come out strongly against protectionist sentiments, saying that there should be a standstill in measures that effectively thwart trade or investment flows.

‘What we need to do is to shine the spotlight on some of these measures and put peer pressure on one another to abide by our leaders’ exhortations not to succumb to protectionist pressures,’ Mr Lim said.

But there could be ‘grey areas’ – for instance, if calls to ‘buy local’ are mere urgings without any clear discriminatory effect against imported goods.

There has to be a collective will not to embark on tit-for-tat measures, and a political will to resist domestic pressures, he said.

The Apec trade ministers will also focus their minds and efforts to restarting the stalled Doha Round of trade talks. World Trade Organization chief Pascal Lamy will be on hand to update the ministers on developments in this area.

Asked about his view on the US stance on free trade, Mr Lim said that he found, from a visit to Washington in June, that the Obama administration has a ‘very ambitious, very crowded’ domestic agenda, with big-ticket items such as healthcare reforms and energy initiatives, on top of dealing with a crisis.

In such circumstances, ‘how do you sell the trade story?’ Mr Lim said. There isn’t a ‘very natural constituency’ that would rally behind calls to keep the trade borders open, yet the US must keep global free trade on its agenda, he said. ‘This is something we’re watching.’

Not least, the Apec trade ministers convening here next week will also seek to move forward on regional economic integration, which would be one solution towards overcoming the global economic crisis.

Apec has long explored as a long-term goal the prospect of a Free Trade Area of the Asia-Pacific (FTAAP).

Source : Business Times – 16 Jul 2009

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Property slump to worsen Asia slowdown

Posted by luxuryasiahome on January 23, 2009

Activity in China, Korea cools fast as force of global financial crisis hits home

Slumping Asian property markets could intensify the region’s economic downturn this year, further undermining consumer and investor confidence and prompting homeowners to tighten spending.

Japan, Hong Kong, Singapore and New Zealand are already in recession, and data yesterday showed activity in regional powerhouses China and South Korea is rapidly cooling as the full force of the global financial crisis hits home.

Goldman Sachs sees economic growth in Asia excluding Japan falling to 4.4 per cent this year from an estimated 6.9 per cent in 2008, but says the risk is to the downside.

‘People are worried about losing their jobs and that the economy will get worse, so they are refraining from making very large investments,’ said Michael Spencer, Deutsche Bank’s Asia economist.

Half the wealth of Malaysia, Singapore, South Korea and India is tied to property, according to CLSA.

In Hong Kong and Singapore, double-digit declines in property prices last year and falling real interest rates have made apartments more affordable, and home prices are forecast to slide another 20-25 per cent this year as the global economy weakens.

Buyers, however, are thin on the ground as investors who lost heavily in Asian stock markets last year have less money to put down for property purchases. Worsening economic data across the region, meanwhile, is also discouraging people from committing to big investments like housing.

As homeowners see the value of their assets being eroded in tandem with the deteriorating economic climate, they become part of a vicious cycle, cutting back on consumption – which needs to grow significantly to offset declining Asian exports – and thereby accelerating the slowdown across the region.

Hong Kong homeowner Maggie Chan fears she will soon be strapped with negative equity on the HK$3 million (S$578,500) two-bedroom apartment she bought eight years ago, owing more on her mortgage than the property will be worth. ‘Property prices are going to go down and that’s making me think a lot more before I spend,’ she said.

As exports and domestic consumption weaken, HSBC forecasts a 0.6 per cent contraction in Asian GDP ex-China and Japan in the first quarter of 2009 from a year earlier, the region’s weakest performance since late 1998 during the Asian financial crisis.

Asia would typically lag a US economic downturn by two to three quarters, but is moving more in sync with the US cycle in this crisis, says Goldman Sachs. That’s partly because the credit crisis is making banks worldwide reluctant to lend, further depressing business activity and property sales.

‘Asian loan-to-deposit ratios are lower now than during the Asian financial crisis,’ said Michael Buchanan, Goldman Sachs’ Asian economist. In Hong Kong, banks are offering 70 per cent mortgages on just 85-90 per cent of the value of a property, says Colliers International.

Receding inflation is enabling Asian policymakers to slash interest rates aggressively but that may not be enough to stimulate demand.

South Korea has introduced measures to support its property market, including easing tax rates on luxury property, but Mr Spencer expects more action may be needed, such as cutting taxes on property transactions and capital gains.

In China, capital gains tax exemptions and reduced down-payment requirements, together with hefty discounts by developers, have boosted property sales though they are still well down on a year ago and supply overhang persists in cities like Beijing and Shenzhen, analysts say.

Source : Business Times – 23 Jan 2009

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2009: A year of two halves

Posted by luxuryasiahome on January 14, 2009

Market volatility likely to persist, yet opportunities may surface in second half

AS unprecedented stress struck the core of the global financial system last year, it was clear to many observers that a worldwide recession was on the way. Citi analysts expect major industrial economies to contract well into 2009 as adjustments occur to raise the level of savings in these economies. And while the pace of contraction in global growth is expected to ease moving into the second half of the year, next year’s expected economic recovery is forecast to be modest, with growth likely to remain below trends seen before the current crisis.

From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.

The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.

Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.

Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan’s experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week’s highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.

For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.

Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.

By NORMAN VILLAMIN, head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.

Disclaimer: Opinions expressed herein should be regarded solely as general market commentary, and may change without prior notice. Past performance is no guarantee of future results.

Source : Business Times – 14 Jan 2009

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Asia ‘may recover in 2nd quarter’

Posted by luxuryasiahome on January 14, 2009

Bold policies, fall in commodity prices will spur quick rebound, says HSBC

THE latest in what has been a stream of predictions about how Asia might come out of the recession suggests that recovery might kick in as early as the second quarter of this year.

HSBC told a media conference yesterday that massive policy responses and a steep plunge in commodity prices should fuel the rebound.

That would mean a V-shaped recovery in which the economy bottoms out and rallies quickly, but it would not be as fast as the recovery from previous crises.

The bank pointed to rounds of aggressive interest rate cuts and substantial stimulus packages in the region, which should spur domestic demand.

‘The cavalry is on its way in the form of the most significant policy response ever,’ said senior Asian economist Robert Prior-Wandesforde. ‘The policy easing and sharp falls in commodity prices should lead to stronger domestic demand, thus generating recovery in Asia.’

This could take place in the next few months. But HSBC cautioned: ‘Deep and sharp V-shaped recoveries have been the hallmark of Asia in the past, but we suspect that this time around, the second upward leg will not be quite as steep.’

Last week, BNP Paribas forecast a ‘V-shaped’ recovery in Asia next year as the massive policy responses kick in.

Professor Danny Quah, head of economics at the London School of Economics and Political Science, who gave a lecture on Modern China organised by the National University of Singapore’s East Asian Institute yesterday, said East Asia is now in a stronger position than during the Asian financial crisis.

Analysts also noted that the sharp correction in commodity prices, most notably oil, will also benefit the region as Asia is more of an oil importer than exporter.

In an earlier report, Morgan Stanley analysts said a US$55 fall in the price of crude oil is like a US$385 billion (S$572 billion) tax cut for Asian consumers, equal to about 5 per cent of the region’s total gross domestic product. Oil was trading at around US$70 a barrel at the time. It is now trading at US$38.

There could also be light at the end of the tunnel for Singapore next year. HSBC expects the economy to shrink 2.8 per cent this year – below the Government’s forecast of between -2 and 1 per cent – before surging 5.5 per cent next year. Lower inflation, thanks to falling commodity prices, a supportive policy environment with expected fiscal easing and improving regional trade are set to fuel recovery.

It noted: ‘While the next six months are going to be very challenging, we believe the ingredients for an end-2009 recovery are falling into place.’

HSBC expects continued volatility in Asian stocks for the year as ‘ultra-low interest rates and huge fiscal packages’ meet global deleveraging. It tipped regional markets to end either 10 per cent higher or lower from their current levels.

But it said this year will be nowhere near as bad as last year, when Asian equities fell by 53 per cent. It advised investors to go for blue-chip household-name stocks, which ’should give decent upside during the upswings, but avoid excessive downside risk during the corrections’.

Source : Straits Times – 14 Jan 2009

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