Morgan Stanley Asia Not So Bearish

Probably still the best strategic house in Asia, Morgan Stanley Asia said Asian stock markets and economies can escape the worst of the global downturn, with China, Hong Kong and Taiwan best placed to ride through the turbulence. Equity strategists at the brokerage added to their ``overweight'' position in Taiwan in their model portfolio of stocks and raised South Korea to ``equal-weight'' from ``underweight,'' a report today said. Malaysia was cut to ``underweight'' from ``overweight.''

``Asia's fundamentals are far stronger. A combination of easier monetary and fiscal policy and lower commodity prices should enable Asia to avoid the worst of the global downturn.''

China and Japan have slashed borrowing costs in the past two weeks to ease the economic fallout from the global credit crunch that is pushing some countries into a recession. The turmoil has frozen credit markets and triggered a worldwide rout for equities, wiping out more than $25 trillion of market value this year.

``If the worst of the global liquidity crisis is behind us, macro strength is probably going to become a key market driver,'' the report said. ``This should favor Greater China. A key difference between Asia today and in 1997-98 is the emergence of China as a key driver of growth.'' China's growth will slow to 9.3 percent in 2009, from 9.7 percent this year, the World Bank last month, predicting that the country is well positioned to withstand financial market turmoil. The central bank cut interest rates for the first time in six years on Sept. 15, following up with two more reductions since. On Oct. 29, the key one-year lending rate was cut to 6.66 percent from 6.93 percent. China is the ``strongest'' to cope with the global slowdown while Australia, Malaysia and India ``face challenges,'' Morgan Stanley said.

Malaysia's ``external macro exposure and limited policy flexibility'' makes it vulnerable to the global slowdown. South Korea's upgrade comes as Morgan Stanley added Samsung Electronics Co. to its portfolio, saying Asia's biggest maker of chips and handsets is ``best positioned'' to ``enjoy earnings growth into 2010.''

On Oct. 7, the International Monetary Fund said the world economy would expand by 3 percent in 2009, paring the 3.9 percent forecast made in July. Emerging markets will account for 100 percent of the global economic growth next year, mainly Brazil, Russia, India, China and other Asian economies including South Korea, the IMF said yesterday.

p/s photos: Warattaya Nikulha

Roach's Take On TARP / The Revised Package

Finance Asia: Stephen Roach, chairman of Morgan Stanley Asia, says the US government’s Troubled Asset Recovery Plan (Tarp), aka the Paulson Plan to bail-out the finance sector to the tune of $700 billion, deserves a grade of B-.Roach’s take: a package needs to deliver the Three S’s: speed, scale and simplicity. In terms of speed, he gives the plan an A- or B+, noting it was churned out very quickly by Washington standards. [It had been; the Republican revolt is a stunning turn against President Bush and Congressional GOP leaders - Ed.]

For scale, he gives Tarp a B- or C+, noting that $700 billion is plenty big, but Congress has decided to dole out funds in tranches, with the first pool only $250 billion. Roach doesn’t think this is going to be welcomed by the market. He is also concerned about some of the red tape and procedures involved in prying out further tranches from Congress. Lastly, for simplicity, he says the original three-page Paulson Plan deserved an A+, but the Congressional bill, at 110 pages over 42 sections, gets a C- or a D+. It includes four new government bureaucracies, including oversight panels, an Office of Financial Stability, an inspector and a schemes administrator. Roach calls this evidence of a “significant regulatory backlash”. “The best grade I can give this is a B+,” Roach says. “The plan does deal with the issues, but in a sub-optimal way.”

Thus, with the fiscal strategy now set forth, attention will turn back to the Federal Reserve Bank, where governor Ben Bernanke will be under pressure to augment Tarp if market confidence doesn’t improve. Roach reckons that Tarp means we are more than halfway through the financial stage of the credit crisis. The real economy in the United States is only partway through. “Most adjustments are yet to come,” Roach warns, “particularly in consumption.”

More ominously, he thinks this crisis will extend to the real economies of Asia – a process that has only just begun. “Asian economies have been the beneficiary of the US consumption boom,” he notes. In 2007, the US consumer accounted for 72% of US GDP growth, thanks to bubbles in property markets, which in turn fuelled bubbles in credit (using home equity loans to borrow, for example). As Americans spend less, it will keep the US economy wobbling at very low growth for a prolonged period of time – and it will hurt Asia.

The US consumer spent $9.7 trillion in 2007, versus only $3 trillion among consumers in China and India combined – and much of that Asian wealth was based on exports. Granted, the US only accounted for perhaps 20% of those exports, but Europe and Japan are also experiencing economic declines as a result of the credit crunch, so Asian export markets worldwide are losing steam. This threatens Chinese GDP growth rates, which have already fallen from around 12% in 2007 to an expected 10% for 2008. A further cut in exports threatens to move Chinese GDP growth to 8%. The government can’t afford to see growth fall beyond that, so it is now cutting interest rates, loosening bank credit rules, and may introduce fiscal stimuli or act against further renminbi appreciation, Roach says.

(MarketWatch) -- The U.S. Senate is scheduled to vote Wednesday on its version of the historic $700 billion Wall Street rescue package, two days after the House of Representatives' stunning rejection of the original legislation.

The move capped a day of behind-the-scenes negotiations to try to salvage some version of the package that the House, defying President Bush and its own party leaders, rejected on a 228-205 vote.

The package before the Senate will be similar to the House version, with these additions, the New York Times reported in its online edition:

• The higher limit for insured bank deposits sought by the Federal Deposit Insurance Corp., which asked to raise the cap to $250,000 from $100,000, to quell opposition by individual and small-business depositors.
• Tax breaks for businesses and alternative energy, part of a package that has been caught in a stalemate in the House of Representatives. The Senate version of the gridlocked tax legislation would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power, the Times said. It would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms, according to the Times.

p/s photo: Fiona Sit Hoi Kei