Diamond Lee Market View
Asian markets have rallied strongly from March lows with the MSCI Asia Pacific index up by 65 per cent. As a result, returns from Asia ex Japan equities are expected to be more moderate with he market now back up to historical average valuations.
Better-than-expected second-quarter earnings in the US and throughout Asia, as well as improving economic data, have led to healthy gains across the regional markets while strong commodity prices and the weaker US dollar have provided a further fillip to certain sectors.
Most leading indicators are positive and, given the amount of liquidity that has been injected into the system, this is unlikely to change in the near term. Inventory levels were drastically reduced earlier this year and they are still being replenished.
Data has been broadly positive, leading economists to increase their previously pessimistic estimates of gross domestic product growth. With economic trends generally on the rise, however, central banks around the world are expected to gradually withdraw excess monetary support.
Australia has already moved in this direction, becoming the first of the G20 countries to raise interest rates in October. The Reserve Bank of Australia since hiked rates twice, from a 49-year low of 3 per cent to 3.5 per cent.
In October, India’s central bank also took the first step towards withdrawing monetary stimulus from the system, ordering banks to return to pre-crisis level holdings in Government bonds. The move is expected to pave the way for a rate rise early in 2010 as inflationary pressures in the country continue to build. Other Asian countries are likely to follow suit, with South Korea expected to be among the first.
Concerns regarding potential monetary tightening have hampered equity performance in China over recent months, with officials at the People’s Bank of China becoming increasingly aware of inflationary pressures.
However, with exports falling and inflation still negative at -0.8 per cent year over year, concerns appear overdone at this stage. That is not to say there will not be some withdrawal of excess liquidity but monetary tightening is not yet necessary and we expect to see inflation move above zero before meaningful tighten- ing is required.
The authorities have reiterated that China remains in the early stages of recovery and the central bank’s policy and positioning is likely to remain supportive until there are clear signs of a sustainable turn-round at both global and domestic level.
At the margins, there are signs that the global rate of improvement is declining. For instance, although earn-ings revisions have remained comfortably in positive territory, this has been from a low base and recent data has shown momentum is slowing.
The earnings’ season was better than expected within Asia but the region has shown similar traits to the Western markets, with expectations largely beaten through cost-cutting activity rather than top-line growth.
Similarly, the recent ISM Manufacturing numbers in the US have indicated that the gap between new orders and inventories is beginning to narrow, which is incrementally less positive.
Export-led Asian markets continue to rely heavily on demand from the US and, with the consumer outlook remaining uncertain, the Thanksgiving and Christmas sales seasons will be keenly watched.
Expectations remain extremely low, however, so results should continue to outpace forecasts in the short term.
Evidence of sustainable final demand and economic recovery will be needed to secure further upside into 2010 but there remains no reason to doubt the longer-term growth story of the dynamic Asia Pacific region.
Diamond Lee is manager of the Ignis Pacific growth fund at Ignis Asset Management