Asia 2H 2007

Some salient points:

a) A diversion away from US denominated assets over the subprime worry, which gives rise to a likely rate cut by Fed in 2H 2007, which translates to a weak USD outlook 2H

b) A big realignment in global bond yields and sovereign debt at the moment, no big thing

c) Despite strong inflows into Asian equities over the last 18 months, valuation in Asia are fair and not overvalued

d) Danger in some Asian currencies being subjected to heavy inflows but not matched by sufficient reserves to withstand currency volatility, e.g. Thai baht, Indian rupee

e) US spending outlook critical for sustaining Asian equity momentum, despite subprime worries, US labout conditions still tight, and Fed's likely rate cut will keep momentum in Asian equity

f) Swift measures by China to create outlets for its liquidity kept Chinese stocks tame for the time bring but significantly boosted the fundamentals for HK via QDII and H-share activity

g) Significant investing upgrades for stocks in South Korea, Taiwan and Japan in 2H 2007. It seems international houses will want to see funds being kept in Asia for the next 12 months at least. China and India seem to be out of favour for the time being but funds still wishing to have Asia exposure

h) Markets doing significant catching up of late include Thailand and Taiwan
i) Subprime worries seem to have peaked to many people
j) USD continued weakness seems to be a blessing indisguise for many investors - net effect US stocks cheaper and will see more funds flowing there for bargains
A check of the chart above showed the percentage gains by the respective Asian indices (ex-China) from 1 Jan 2006 till 2nd week of July 2007:
1) India - Sensex +58.8%
2) Malaysia - KLCI +53%
3) HK - Hang Seng +52.6%
4) Singapore - STI +52.9%
5) Taiwan - TWI +44.7%
6) Thailand - SET +16.3%
7) Japan - Nikkei +9.9%
The remarkable thing from the relative returns was the aggregation and convergence of returns by the top few bourses: India, Malaysia, Singapore, HK all showed almost the same returns over the specified period. Everyone's a hero, everyone's a winner. As mentioned before, its only natural for Thailand to catch up to the rest.
There seems to be a lot of catching up to do for Japan, which is my favourite market for the next 6-12 months. However, we cannot assume that to be the case because the fundamentals governing Japan is quite different from the rest of Asia. Asian currencies are all on an uptrend, accumulating surpluses, benefitting from China's role in the new economy, enjoying the benefits of globalisation... except Japan, which has seen its yen being a huge obstacle to attracting better returns for the Nikkei. The yen carry trade has been a big factor, keeping the yen weak.
However, I am of the opinion that the prolonged undervaluation of the yen has actually allowed for a build up of growing profits and better competitiveness among Japanese companies. These pent up forces will burst forth very soon via massive profit upgrades. The once benign domestic consumer forces has indicated over the past few months that its about to breakout as well.
Top Tier Markets For 2H 2007
Japan
South Korea
Taiwan
Thailand
Still Good For 2H 2007
Malaysia
HK
Singapore

Comments

simon_alibaba said…
what happen to the goldilock economy? expect the fed to just maintain the rate 5.25% for the rest of the year. The biggest risk is still if fed suddenly think of inflation and start raising again. hmm very similar to 1987 oct black monday question is when? becareful ha.
dali, i wonder if there are any contradictions as to whether the return of foreign investors enhancing the strength of our ringgit. Seems that our blue chips are in dire need of buyers which explain why the mkt is so sluggish despite the hefty increase in index points.
sahamgurl said…
Hi Salvador, thanks for your insights - do you have any picks for Japan? Thanks!
Salvatore_Dali said…
mkt is sluggish because this has been a blue chips rally, most of the retail players are not in this one... which is a mistake... even if foreign investors don't like our equities, they will still like the ringgit with a decent interest rate kicker

sahamgurl,
this time around it will be led by consumer, so focus on consumer stocks, the other natural beneficiaries will be financials and exports
sahamgurl said…
thanks salvador!