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07/26/2011 / FLASH / CHINA - HONG KONG - KOREA, REPUBLIC OF - SINGAPORE
Fixed Income Markets Research team presents "Asia outlook and Strategy: mid-year 2011" to clients
The Fixed Income Markets (FIM) Asia ex-Japan Research Roadshow on "Asia Outlook and Strategy for Mid-year 2011" was successfully held from 7th to 15th July 2011 in five Asian cities: Singapore, Hong Kong, Shanghai, Seoul and Taipei. This year's theme was "Flying Through the Clouds". During the roadshow, FIM Research representatives shared their views with a total of 562 clients on the following topics: - Is the global growth engine running on empty? - Life after QE2: what now for G10 monetary policy? - Cyclically bullish, structurally bearish: why buy the USD? - Will emerging Asia keep leading global growth? - Can the bull market in Asian Foreign Exchange survive a stronger USD?
Mitul Kotecha, Head of Global Foreign Exchange Strategy, said, "There remain many risks to the global economy but the ‘soft patch’ will prove temporary. The United States will lead the G3 recovery and Japan’s economy will bounce back due to reconstruction efforts. European growth will be led by Germany but the periphery will remain weak. We look for GDPGross Domestic Product (GDP) is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). GDP is one of the key measures of national income and output for a given country's economy. growth of 2.5%, -0.7% and 2.0%, respectively, for the United States, Japan and Eurozone, for the full year 2011. Major central banks have diverged in their policy stance. We expect an eventual hike in the Fed Funds rate in Q312. The Bank of Japan will be in no hurry to normalise policy and we expect no rate hikes in Japan in the forecast horizon. The European Central Bank, in contrast, will hike the refi rate 1.75% by the end of the year. Bond yields are set to move higher, especially in the United States and Europe. The end of QE2 in the United States will lead to a significant altering of Foreign Exchange market dynamics and higher relative United States bond yields will provide more support for the USD. The EUR will succumb to persistent and ongoing Eurozone peripheral tensions despite higher interest rates, while USD/JPY will move higher in the wake of widening United States/Japan bond yields. We continue to favour commodity currencies."
Dariusz Kowalczyk, Senior Economist and Strategist for Asia ex-Japan, continued, "Emerging Asian economies are gradually slowing but pace of expansion remains fast. We expect annual growth of 7.8% this year, down from 9.2% in 2010 but still above ten-year average. Strong growth driven by domestic demand was bound to trigger inflation, and central banks responded with rate hikes and liquidity tightening. Since late 2010, China and India have been among the most aggressive. Given prospects for lower commodity prices and some slowdown in price pressures in H2, upside for monetary tightening is more limited, and we anticipate one to two 25bp hikes in H2 throughout the region, except in China, where a pause is likely. We also expect the majority of Asian currencies to continue rising versus key major currencies. Solid current account positions are the foundation for their strength, and we expect this to continue. The upbeat growth outlook is also bound to attract more direct investment, as well as inflows into regional equity markets. Rising interest rate environment should bring in portfolio flows as well. Foreign Exchange gains are likely to be more pronounced against the EUR, while more muted vis-à-vis the USD. Our top picks are the KRW, the PHP, the CNY and the THB."
Frances Cheung, Senior Strategist for Asia ex-Japan, concluded, "In the near-term, most Asian IRS curves are likely to remain flat, with monetary tightening still underway in Q3 and re-assessment of the risk of a slowdown in economic activity in Asia. Thereafter, curves are expected to re-steepen. Given prospects for lower commodity prices and some slowdown in price pressures in H2, we expect a pause in the current tightening cycle after Q3 in most Asian economies. As such, front-end rates will ease due to the respite from the monetary side, combined with an expected improvement in risk appetite and thus liquidity. On the longer-end, liability hedging flows are likely to re-emerge when investors realise the growth outlook is better than previously thought, leading to steeper curves. On the government bond side, we continue to favour Indonesian, Korean, Thai and Chinese bonds which offer attractive yields, while the fiscal positions in these places are largely healthy. There could also be local factors driving yields and rates. For example in Thailand, the continued return of maturing kimchi funds is easing USD liquidity, pushing up 6M THBFIX – the floating leg of THB IRS. In Hong Kong, flush interbank liquidity serves as a buffer to avoid any abrupt jumps in HIBORs, while we see upside to CNH rates on more supply of CNH products."
