SINGAPORE–Will high oil prices scupper forecasts of lower inflation and interest rates in Asia, even as evidence mounts that economic growth is slowing?
It''s a tough call, analysts say. On the one hand, Asia''s central banks will be keen to prove their commitment to fighting inflation, a mandate they embraced quite recently.
Yet there''s bound to be a temptation to keep credit cheap in order to boost investment and spending at a time when global demand is about to slow, particularly in Asia, where interest rate policy is often influenced by politicians.
Inflation in most of Asia has decelerated. Taiwan''s consumer price inflation slowed to an annual pace of just 0.79 percent in July.
Indonesia has the region''s highest inflation rate, at 15.15 percent in July, but even that is three points below last year''s peak.
But economists are concerned that inflation will rear up again and that central banks may drop their guard too soon.
“Asian countries are trying to get away with loose monetary policy as long as they can,” said Andy Xie, Morgan Stanley''s economist.
“But in the long run, if you tolerate inflation, when your currencies are strong, you are OK. When your currencies are weak, you are in trouble.”
Economists worry not just about dear oil, which hit a record high of 78.40 dollars a barrel in July and is now around 72 dollars.
Property prices are climbing in Singapore and China and remain high in South Korea''s capital, Seoul.
Industries are operating at near full capacity for the first time in years. Chinese export prices are climbing at between 1 to 2 percent annually, faster than at any time since the 1997/98 Asian crisis.
Xie says inflation in Asia is no longer merely coming from the supply side, owing to exogenous factors such as the cost of imported oil and commodities.
Wages in India, South Korea, China and most of Southeast Asia are rising and Asia can no longer be complacent about its cheap manufacturing sector, which held down consumer prices in the past, he said.
“So manufacturing is not insurance against inflation any more. And then, we have services inflation everywhere,” Xie said.
Asia has not had to worry about inflation since the crisis, which turned consumers thrifty and left businesses saddled with the huge manufacturing capacity they had built in the 1990s.
But inflation has risen steadily in the past three years, helped by faster economic growth, which prompted governments to pass the higher costs of oil down the regulated distribution line.
HSBC economist Robert Prior-Wandesforde said average inflation in Singapore, Thailand, Malaysia and the Philippines had jumped to 5.5 percent in the second quarter of 2006 from 1.4 percent in mid-2002. Including outlier Indonesia, inflation in the five countries averages 10 percent.
Prior-Wandesforde said inflation may be peaking as the effect of last year''s surge in domestic fuel prices wears off, but he felt the drop in inflation would be nowhere near consensus expectations.
“Nevertheless, the fact that inflation is heading lower will encourage various central banks to begin cutting rates,” he said.
A study of Asian central bank reactions in the past showed they were heavily influenced by growth developments, he said, adding: “Signs of slowdown are likely to be met promptly by rate reductions.”
Bank Indonesia has cut rates three times this year, taking its benchmark rate to 11.75 percent. Some economists think the easing was premature. The Bank of Korea and Bank of Thailand have hinted that their policy tightening phases have ended.
The Philippines last raised rates in October. Malaysians earn negative real returns on their savings because the policy rate of 3.5 percent is 50 basis points below consumer price inflation.
LATE-CYCLE RATE RISES
Some analysts maintain that Asian central banks will not lower their guard on inflation.
To be sure, the authorities in Asia were worried about low investment and weak domestic demand, which had resulted in huge savings and current account surpluses, said JPMorgan Chase economist Sin Beng Ong.
“But within the purview of the central banks, especially when most of them have adopted inflation-targeting frameworks, that''s not their business,” Ong said.
Westpac Bank economist Huw McKay sees more Asian policy tightening in the pipeline.
“It is not going to be set to an outright contractionary setting but people are calling an end to the Asian tightening cycle a little bit too early, just because you have got some benign-looking inflation data.
”When push comes to shove, a central bank will prioritize inflation over growth in the short term, because some time down the line they might have to set policy easier than they would do otherwise, because of a growth problem."
Schroders says emerging stock rally just starting\r\nvenerdì, 17 novembre 2006 12.51\r\nBy Jeffrey Hodgson\r\n\r\nHONG KONG (Reuters) - An emerging market rally that has nearly tripled share prices since 2002 is just getting started as developing economies take off, a Schroders fund manager said on Friday.\r\n\r\nThe change in economic fundamentals is so great that international investors should treat them as a safe haven in the event of a global economic slowdown, said Allan Conway, head of global emerging market equities for the fund manager.\r\n\r\n"The general view that it is appropriate now to be cautious of emerging markets, we believe, is simply wrong," Conway told a media briefing in Hong Kong.\r\n\r\n"We are putting forward the proposition that this time it''s different, and I know that''s a very dangerous thing to be saying."\r\n\r\nEmerging market stocks as measured by MSCI''s main emerging market stock index have risen almost 190 percent since the start of 2003.\r\n\r\nBut the sector suffered a sell-off this year, driving the index down almost 25 percent from an all-time high on May 10, before it largely recovered.\r\n\r\nConway, who helps manage the firm''s $2.5 billion (1.3 billion pound) BRIC (Brazil, Russia, India and China) fund, said future sell-offs are possible but that emerging markets can be counted on to recover losses and move higher over time.\r\n\r\nThe London-based manager said his fiercely bullish stance is based on strong long-term growth prospects for developing economies.\r\n\r\n"The strong growth that has underpinned stock market performance for the last six years is expected to continue for the next decade," he said.\r\n\r\nOVERWEIGHT FINANCIAL STOCKS\r\n\r\nMore importantly, many emerging countries are relying less on exports to developed markets and more on domestic demand and trade with peers, which should blunt the impact of a slowdown in a major developed economy such as the United States, he said.\r\n\r\nAnd in a major break with the past, emerging economies now have superb fundamentals including current account surpluses, undervalued exchange rates and strong foreign exchange reserves, he said.\r\n\r\n"The situation today has been completely transformed … emerging economies are stronger than the developed economies," he said. "Even Latin America is now a net creditor region."\r\n\r\nThe firm''s favourite markets in Asia include South Korea and Thailand because of their low valuations. Its least favourite major market in the region is India, judging that after stock prices there have gotten expensive. The firm is neutral on China.\r\n\r\nOn a sector basis, it is underweight materials stocks, with a view that commodity prices are likely to stay flat from current levels. It is overweight financial stocks.\r\n\r\n"The financial sectors are always a good proxy on global growth," he said.\r\n\r\nThe largest holdings in its BRIC fund as of October 31 still included energy firms such as Brazil''s Petrobras, Russia''s Gazprom and LUKOIL, and China''s CNOOC.\r\n\r\nFinancial holdings included Chinese insurer Ping An and Brazil''s Banco Bradesco.\r\n\r\nSchroders said the fund has returned 42.36 percent since its launch in October 2005, lagging a gain of 49.88 percent in the MSCI BRIC Gross index over the same period.\r\n\r\nConway said the fund lagged because it had trouble putting heavy inflows of cash to work but that it had performed strongly relative to other BRIC funds.\r\n\r\nhttp://www.borsaitaliana.reuters.it/news/newsArticle.aspx?type=fundsNewsUK&storyID=2006-11-17T115128Z_01_NOA742685_RTRUKOC_0_FINANCIAL-SCHRODERS.xml&archived=False
Emerging-Market Fund Inflows Rise for 7th Week on China Buying
By Michael Tsang
Nov. 20 (Bloomberg) – Emerging-market stock funds recorded a seventh straight week of inflows as investors poured more money into those that invest in China. Japan equity funds suffered weekly withdrawals for the fifth time in six weeks.
Funds investing in developing countries attracted $697 million more than they lost from redemptions in the weekly period ended Nov. 15, according to figures from mutual funds, hedge funds and exchanged-traded funds compiled by Emerging Portfolio Fund Research in an e-mailed statement today.
China equity funds accounted for 41 percent of the inflows on a net basis, the Boston-based fund research firm said. For the year, China funds have drawn about two-fifths of the more than $18 billion in net buying of emerging-market stock funds.
Global investors have been lured by returns in China that have been among the best in the world this year.
The so-called H share index of mainland companies listed in Hong Kong that foreign investors can freely buy and sell has surged 55 percent in dollar terms in 2006.
That''s almost three times the 19 percent gain in the Morgan Stanley Capital International Emerging Markets Index this year, and more than quadruple the 12 percent climb in the Standard & Poor''s 500 Index, which climbed to a six-year high last week.
Gains in China have been fueled an economy which grew at 10.4 percent in the third quarter. The pace is the fastest among the 20 biggest economies globally and has been supported by spending on factories, real estate and infrastructure ahead of the 2008 Olympics in Beijing.
Withdrawals from funds that invest in Japan totaled $627 million last week, slicing net inflows for the year by almost half to $760 million, Emerging Portfolio said. Meanwhile year-to- date returns have averaged minus 6.8 percent, the worst among all major fund groups tracked by the firm.
Shares in the world''s second-largest economy have been hurt this year in part because the nation''s recovery hasn''t translated into higher earnings growth. Japan''s Nikkei 225 Stock Average has dropped 2.4 percent in 2006, while the Topix index has slumped 7 percent, the worst performers among benchmarks in the 10 largest developed markets.
Benchmark stock indexes in the nine other developed markets have all posted gains in 2006.
Japan, which suffered three recessions since 1991, is now in its 57th month of growth, equaling the so-called Izanagi boom of 1965-1970, the longest expansion since World War II.
Still, forecasts by companies that reported first-half earnings show pretax profit from operations may rise 3.7 percent in the year ending March 31. For the first six months, profit climbed 12 percent. Last week, a government said demand for services in Japan fell twice as much as expected in September as consumer spending slumped and wage growth stalled.
To contact the reporter on this story: Michael Tsang in New York at email@example.com.
SINGAPORE (XFN-ASIA) - The Monetary Authority of Singapore (MAS) said global equity prices may fall amid a more volatile trading environment next year if the US economy suffers a sharp slowdown, dragging with it the global economy. In its latest financial stability review, Singapore''s de facto central bank said financial markets around the world may not have fully priced in the possibility of slower global growth next year despite signs of a moderating global economy.
"A sharper growth slowdown might lead to a broad-based re-pricing of assets and to sharp spikes in risk premiums as well as corrections in equity prices," MAS said. MAS said there is the possibility that the global economic weakness will be more severe, following four years of strong growth, given the nature of the US-led slowdown, arising from adjustments in the housing sector.
"With equity market possibly not having fully priced in the transition and credit spreads remaining narrow, a sharper-than-expected slowdown could lead to overshooting of asset prices and greater volatility in global financial markets," it said. "A sharp slowdown in US growth as well as further escalation of geopolitical risks could have a negative impact on the regional markets."
MAS said the continued moderation in the US economy is likely to weigh further on East Asia not only because of its importance as an exports destination but also since much of the intra-regional trade in intermediate goods is indirectly linked to US economic conditions. But East Asian economies are now in a stronger position to withstand the economic slowdown.
"The impact from the slower growth in the US is likely to be cushioned to some degree by continued expansion in China and India, domestic demand growth from easier monetary policy, and infrastructure spending," MAS said. MAS believes the recent sell-offs in regional equity markets do not appear to be a result of overvaluation as price-to-earnings ratios are relatively low and stable.
"It was more a correction as markets that saw the greatest sell-off were the ones that had earlier recorded the strongest gains," it said, adding that as of Tuesday "regional markets had broadly exceeded their previous highs." Turning to Singapore, MAS said the financial system here has remained sound, supported by improving financial position of banks, corporates and households.
It noted that corporate profitability across a broad range of industries have risen while debt servicing capacity and liquidity positions remained healthy and operating performance of domestic banks looks strong. "Looking ahead, while the operating environment may become more challenging as GDP growth slows, the financial sector is well positioned to withstand some expected moderation in domestic economic activity," it said.
Asia Stocks May Rise for 5th Year on Japan Spending (Update1)
Dec. 29 (Bloomberg) – Asian stocks rose for a fourth year, the longest winning streak in almost two decades, and may increase in 2007 as consumer spending picks up in Japan and China, the region''s two biggest economies.
Stock benchmarks in China, Hong Kong, India and Indonesia set new highs in December, helping push MSCI Asia-Pacific Index excluding Japan up 29 percent this year. Slowing growth in Japan made the Topix index the worst performing gauge among the world''s 10 largest markets. The MSCI index that includes Japan climbed 14 percent through yesterday, behind Europe and the U.S.
JPMorgan Chase & Co. and Goldman Sachs Group Inc. predict Japan will join the rally next year as rising salaries help reverse a slump in household spending. Consumers are spending more in China, where the economy is growing faster than 10 percent and the government is raising minimum wages and welfare payments.
``Both Japan and China doing well is going to drag more money into Asia,'''' said Donald Gimbel, who manages $2 billion at Carret & Co. in New York. ``Things are very positive.''''
The MSCI Asia-Pacific Index''s rise this year was less than the 14.3 percent increase in the Standard & Poor''s 500 Index and the 31 percent gain in dollar terms for the Dow Jones Stoxx 600 Index of European companies. Even so, four consecutive years of gains in Asia is the longest stretch since calculations began in 1988. Japanese stocks account for more than 40 percent of the regional index''s value.
Demand from China and India, the world''s fastest-growing major economies, helped spur increases across Asia. Energy companies had the biggest advance, as their MSCI index climbed 31 percent.
Asian stocks outside of Japan probably will deliver 20 percent returns next year, said Timothy Moe, a Hong Kong-based strategist at Goldman. U.S. and European stocks may have smaller gains, according to surveys of strategists by Bloomberg News.
Concern this year that higher energy and borrowing costs would damp spending in the U.S., Asia''s largest export market, caused swings in share prices. The MSCI Asia-Pacific retreated 19 percent from its May 8 peak to its June 13 low, the biggest decline since 2002.
The benchmark climbed 21 percent since then as oil prices fell from records and the U.S. Federal Reserve stopped raising interest rates after 17 straight increases.
Gains in Japanese stocks were capped as the world''s second- largest economy flagged. Growth slowed in the second and third quarters, and the most recent period was the weakest since 2004.
Japanese consumer spending may rise next year. Households last month were the most optimistic since May as gasoline prices dropped, the Cabinet Office said on Dec. 11. The jobless rate is near an eight-year low, a government report on Dec. 1 said.
``All that should equate into good consumption,'''' said David Ishibashi, who manages $325 million in San Francisco at Matthews International Capital Management LLC. The firm''s Japan fund, since its start at the end of 1998, has doubled its return, exceeding the 57 percent gain in the Topix in dollar terms, including dividends. ``We''re really starting to position ourselves in domestic-oriented names,'''' including real-estate stocks, Ishibashi said.
Japan''s government forecasts the economy will expand 2 percent in the year starting April 1, up from an estimated 1.9 percent this year.
The projections may be optimistic. Japan''s retail sales rose less than expected in November, climbing a seasonally adjusted 0.1 percent from a month earlier. Sales slipped 0.1 percent from the same month last year, the Trade Ministry said Dec. 27.
`Still Very Upbeat''
The Nikkei 225 rose 6.9 percent this year after a 40 percent surge in 2005. The Topix gained 1.9 percent in 2006 following the previous year''s 44 percent climb.
Seven & I Holdings Co., Japan''s biggest retailer, and Softbank Corp., owner of the world''s third-largest mobile-phone company, were among the biggest losers. Their shares plunged 27 percent and 54 percent, respectively, in 2006.
Chinese stocks rallied as the economy grew more than 10 percent for a fourth straight year. Gross domestic product will expand at that pace next year, double the projected 4.9 percent global growth rate, according to the International Monetary Fund.
``We''re still very upbeat on China,'''' said Adrian Mowat, a Hong Kong-based equity strategist at JPMorgan. ``The goal of the Chinese authorities is to maintain a high level of economic activity.''''
The Shanghai and Shenzhen 300 Index, which tracks yuan- denominated A shares on China''s two exchanges, today rose to its highest since calculations began in April 2005. The index gained 129 percent this year, trailing only a 143 percent surge in Vietnam''s VN Index. In Hong Kong, the Hang Seng China Enterprises Index this month surpassed a record set 13 years ago.
Share sales in China, such as Industrial & Commercial Bank of China Ltd.''s record $22 billion initial public offering and Bank of China Ltd.''s $13.7 billion IPO, aided the rally.
Industrial & Commercial, the nation''s biggest bank, rose 57 percent in Hong Kong after its Oct. 27 debut. Bank of China, the second biggest, began trading in May and gained 45 percent.
Stewart Paterson, Credit Suisse Group''s regional equity strategist in Hong Kong, said he is ``very cautious'''' about Chinese stocks because they are expensive.
The Shanghai and Shenzhen 300 is valued at 29.6 times estimated earnings, exceeding the MSCI Asia-Pacific''s 18.4 times, according to data compiled by Bloomberg. The S&P 500 is at 16.2 times and the Stoxx 600 at 14.2 times.
China isn''t the only Asian market where stocks are costly by global standards. The Nikkei is valued at 23.6 times projected profits. In India, the Sensitive index gained 47 percent this year and now trades at 20.3 times earnings.
``We have all the symptoms of a kind of investment mania,'''' said Marc Faber, founder and managing director of Marc Faber Ltd., a Hong Kong-based investment company that manages about $300 million. ``We could have a severe setback in the first quarter next year. I''m actually selling.''''
Shares in Singapore and Australia are cheaper. In Singapore, the Straits Times Index has gained 27 percent in 2006 and is valued at 16.3 times forecast earnings. Shares of companies Australia''s S&P/ASX 200 Index, which jumped 19 percent this year, trade at 15.8 times.
In South Korea, companies in the Kospi index trade at about 61 percent the value of Japanese shares on average. The index rose 4 percent this year.
Anthony Muh, who helps manage $1 billion at Alliance Trust Plc in Hong Kong, expects Asian stocks to keep rallying because of the outlook for economic expansion in the region. India''s economy has grown faster than 8 percent in six of the past seven quarters, including last quarter, when the rate was 9.2 percent. South Korea''s $788 billion economy has advanced for 14 consecutive quarters, the longest stretch of growth in a decade.
``We''re in a period of growth,'''' said Muh. ``That provides some level of assurance that the Asian markets won''t topple.
China set to act on ballooning reserves\r\n\r\nThursday January 11, 2007\r\nSINGAPORE: China, the first country to amass US$1tril in reserves, is set to revamp the way it manages that stockpile, and investment managers have reason to be both eager and nervous. \r\n\r\nIt could channel a portion towards high yielding assets and securing raw material supplies for the fast growing economy, analysts said, but investors are jittery it might lead to further diversification of the hoard into non-dollar assets. \r\n\r\nChina’s alarming rise in foreign reserves has sparked calls to chase higher returns to set a precedent for domestic firms and help slake the country’s voracious appetite for raw materials. \r\n\r\nAn investment company similar to the Government of Singapore Investment Corp (GIC), which manages more than US$100bil of assets, could take shape in the coming months. \r\n\r\nTop Chinese leaders are expected to discuss the issue at a key financial meeting to be held soon, analysts say. \r\n\r\n“It’s definitely going to happen – the more the reserves, the easier it becomes to take US$10bil or US$20bil of that stockpile to work it through some kind of fund,” said Stephen Green, an economist at Standard Chartered Bank in Shanghai. \r\n\r\n“The problem is not the willingness of the government to do it. The problem is how to do it.” \r\n\r\nVice Premier Zeng Peiyan has proposed tapping into the bloated reserves to help build strategic stocks of mineral resources for the world’s fourthlargest economy. China is set to post its fourth straight year of double-digit growth in 2006.\r\n\r\n Its steel mills have come under pressure in recent months as they face aggressive price rises by foreign iron ore suppliers. \r\n\r\n“It looks like a stone with which China can kill two birds – the growing imbalance in its international payments and its need for key resources like oil and minerals,” the China Daily said in an editorial published on Dec 28. \r\n\r\nAnalysts say reform is in the offing despite the bureaucratic wrangling between the People’s Bank of China (PBOC) and Finance Ministry over which agency should control the new firm. – Reuters\r\n\r\nhttp://biz.thestar.com.my/news/story.asp?file=/2007/1/11/business/16534921&sec=business