Asia in an economic ‘sweet spot’

THE global economy is improving albeit at a very gradual pace as indicators have been signalling in recent months. One such guide has been the equity markets, usually a proxy of things to come economically, which have been on the up since November.

But there is still a lot of confusing information out there and that's because of the volatile sentiment and outlook.

The oft-quoted observation that risks continue to cast a shadow over growth prospects has become a somewhat tiresome refrain with its familiar litany of further deterioration in the eurozone debt crisis, slower-than-expected growth of the US economy and lingering concerns over inflation.

However, what investors will want to know is if there are any clearer greenshoots that the global economy is on the uptrend again after slowing down early last year.

For Malaysians taking an interest in the economic pulse of the country, they will want to know if growth has indeed bottomed out in the first quarter as economists expect.

The slight correction in the equity markets earlier in the month following the release of weaker than expected US non-farm payroll for March showed that sentiments among investors are still fragile.


Brighter prospercts: New container ships under construction at the Qingdao Beihai shipyard in Qingdao, northeast China’s Shandong province. The diminishing threat of inflation and the smaller risk of a hard landing of China’s economy all point to brighter prospects and earnings revisions in Asian equities. — AFP
Uneven growth

HwangDBS Investment Bank Bhd chief investment officer David Ng says in a report published mid-week that equity markets “are in a consolidation phase now, whereby markets will go up by 15%-20% before declining over and again as we have uneven growth across the world on the back of unstable structural issues that have yet been resolved”.

He points out that the debt and growth problems in the developed markets will take years to resolve, which means that volatility will continue to be a feature during the consolidation period.

“The question is, should investors invest now? If so, where?” he asks, adding that Asian equity markets are in a “sweet spot” due to the improving global macroeconomic picture as well as ample liquidity.

Ng says the fate of the equity markets essentially will depend on how the three major economies the United States, Europe and China fare, and in the house's view, this will change the course of markets in 2012 as compared with the last two years when they trended downwards in the second and third quarters following a strong start to the year.

“The case is different today as global growth is showing signs of an uptrend. As a proof, the International Monetary Fund upgraded their global growth forecast on April 17 to 3.5% this year,” he says.

Besides the revision of global growth upwards, US home prices bottoming out, higher economic growth rates, lower unemployment rates, progress in the eurozone crisis as compared to a year ago, the diminishing threat of inflation and the smaller risk of a hard landing of China's economy all point to brighter prospects and earnings revisions in Asian equities.

Futhermore, Ng says the markets are still flushed with liquidity as the low interest rate environment in the US will continue until end-2014 and this is compounded by easy refinancing terms by the European Central Bank and China's looser monetary policy.

“Asia is the place to be, given its relative healthy economic fundamentals and strong corporate and government balance sheet compared with developed counterparts. The recent positive earning revision in this region confirms our call,” he adds.

Ng says that when the market is flooded with easy money or credit lines, making it easier for sentiment to improve and the confidence to gravitate towards taking on more risk.

“Liquidity is an important factor as it will provide support and an additional leg to the market. In other words, should there be any correction it will be shallow, as investors that were caught short in the recent rally will take it as buying opportunity,” he says.

Additionally, Ng says the improving macro-economic picture will provide the market with the confidence to take on more risk and this risk-on mode will power the next leg up.

The Malaysian context

He advises investors to “average-in and avoid timing the market as nobody, even the best investment professionals, can time the market to buy at the absolute low and sell at the absolute high”.

Most economists believe the first quarter of this year will see the bottoming out of the country's economy in terms of growth as restocking-driven stabilisation in manufacturing output and Economic Transformation Programme (ETP)-driven investment activities support growth going forward.

Citigroup Inc senior economist Kit Wei Zheng says in a report that data from the first two months of the year supports the house's view that a modest slowdown can be expected for the first quarter despite a drop in motor vehicle sales and output due to the supply disruptions and softer demand post tighter auto lending rules.

“We continue to expect growth momentum to pick up from the second quarter, led by re-stocking driven gains, ETP-related investment spending, and pre-election fiscal boost to consumer incomes,” he says.

While the fiscal boost to domestic demand and higher commodity prices have the potential to add to core inflation pressures in the second-half of the year, Kit expects the consumer price index to tick up from the second-half to above 3% by early 2013 from 2.1% to 2.2% in the second quarter.

He says seasonally-adjusted, January and February industrial production and export levels were 2.7% and 12.6% above fourth quarter levels with both manufacturing and exports look set for decent sequential growth in the first quarter, after being broadly flat between September and December.

Kit says this largely reflects re-stocking driven gains in the electrical and electronic (E&E) industries and expects E&E exports to pick up substantially in the second quarter, following regional peers.

“Elsewhere, indicators paint a mixed picture of growth in domestic demand, with some signs that ETP-related and public sector investments are gaining traction ahead of elections,” he says.