In recent months, we have seen stronger European Central Bank action and political commitment from EU policy makers, in terms of putting their fiscal house in order. We believe that efforts by the ECB to inject liquidity into the financial system will anchor a gradual stabilisation of the situation.
Recent economic data out of the US has been better than expected and has added to our confidence. The US economy continues to be one of the most important to Asia, relative to the EU.
Near-term risk appetite in Asia has improved, as a result of these encouraging developments in both the EU and US.
The rally in Asia Pacific ex Japan equities continued into February, though the pace of advance moderated. Among the MSCI Indices, Hong Kong, Philippines, Taiwan and China were the stronger performers. Hong Kong property stocks saw sharp re-rating as investors grew more confident that China’s growth is sustainable. In Taiwan, the technology sector led the upswing on the back of positive news flow regarding new product launches in mobile and PC gadgets.
In Asia, economic data continues to point towards a soft landing, particularly in China, where persistent efforts in 2011 to cool its economy has successfully contained inflationary pressures and enabled the People’s Bank of China to cut its required reserve ratio by 50bps, a sign that it is seeking to relax liquidity constraints.
India’s inflation benchmark, the Wholesale Price Index, came in at 6.55%, which is also encouraging as it helped confirm the downtrend since October.
Healthy fiscal and current account balances elsewhere in Asia have given central banks the flexibility to ease policy rates. Bank Indonesia has eased interest rates significantly since December 2011; the country’s credit rating has recently been upped to investment grade by rating agencies Fitch Ratings and Moody’s Investors Service.
Central banks in the Philippines and Thailand have also cut rates. Based on such data, it is likely that the twin concerns of rising inflation and a sharper growth deceleration will continue to dissipate.
However, the rapid rise in the price of crude oil dampened investor sentiment, especially towards Indonesia where the sustainability of fuel subsidies once again hogged the limelight. If such subsidies were to be reduced, it would spark a hike in inflation that could invite another round of monetary tightening. Hence, we remain watchful for renewed inflation concerns.
On the whole, the Asian growth story remains intact, given the strong fundamentals at both the sovereign and corporate level. Within this backdrop, we believe that companies exposed to growth themes such as increasing urbanisation and consumption in China – particularly within the consumer, energy, agricultural, resources and infrastructure-related sectors – continue to show promise.
We also recognise the attractiveness of investments providing high dividend yields funded by resilient cash flows, as these present a stark value proposition in comparison with meagre interest rate returns from cash fixed deposits.
We believe that as long as the situation in the EU doesn’t worsen, growth in the US and Asia should be positive in 2012, as far as equity markets are concerned.
