21 September 2019
The People's Bank of China is likely to unveil more monetary easing measures to counter deflation and capital outflow pressure. Photo: Bloomberg
The People's Bank of China is likely to unveil more monetary easing measures to counter deflation and capital outflow pressure. Photo: Bloomberg

North Asia markets to outperform in second half

First-quarter economic figures in the United States have disappointed the market for the second year. This year, the first-quarter data has been affected by poor weather. Therefore, we could expect economic growth to accelerate in the second and third quarter of this year.

In its April statement, the Federal Open Market Committee said the weak economic growth in the first quarter in part reflected “transitory factors”.

In the second half, the boost for consumer spending from low oil prices will become more pronounced, and the low mortgage rate and steadily recovering labor market will improve the housing market.

The Fed is likely to hike the interest rate in September on the back of better economic growth outlook.

On the other hand, China’s trade data in April lagged behind market expectations. Exports dropped 6.4 percent last month from the year ago, compared with a market forecast of 1.6 percent growth. Imports, meanwhile, plunged 16.2 percent versus an estimated drop of 12.2 percent.

Given the string of gloomy economic figures, the People’s Bank of China (PBoC) is set to ease the monetary policy. The government is also expected to further relax its grip on the property sector.

The Chinese central bank cut the reserve requirement ratio (RRR) by 100 basis points on April 19, in a sign that Beijing will roll out more aggressive monetary easing measures to counter deflation and capital outflow pressure.

Therefore, authorities could meet the short-term financing demand for the 1 trillion yuan (US$161 billion) debt swap program for local governments.

The PBoC is likely to reduce the RRR by another 50 basis points and cut the interest rate by 25 basis points in the next three months.

Looking beyond, another RRR cut of 100 basis points might be adopted within six to 12 months, and the Chinese central bank will step up efforts in utilizing policy tools like reverse repurchase program, medium-term lending facility and standing lending facility.

These Chinese versions of quantitative easing will bolster the nation’s economic growth in the second half of this year.

Among Asia markets, we prefer those who are direct beneficiaries of China’s monetary easing and US economic recovery. Investors could increase their holdings of Japan, Australia, China, Hong Kong, South Korea and Taiwan stocks by taking advantage of short-term corrections.

North Asian markets have more attractive valuations than Southeast Asian markets and Indian stocks.

We like Japan, South Korea and Taiwan markets because they are export-oriented and have high concentrations in technology. These markets will benefit from improving US consumption as well as from China’s economic uptick in the second half due to their close trade ties with the Asian giant.

These three markets have taken the lead in earnings recovery in Asia, while the cyclical trends and technical analyses are also very supportive.

A historical study of capital flows in Asian markets shows that the US interest rate hike will drive up market volatility in the short term and decrease US dollar liquidity.

India, Indonesia, Malaysia and South Korea will be more vulnerable to capital outflows due to their high dependence on foreign debt. By contrast, China and the Philippines will be less affected, while the impact is neutral for Singapore, Taiwan and Thailand.

Historical data also shows that when the short-term market turmoil settles, the regional liquidity and fundamentals will again take dominance. The capital will flow back to Asia within one to two quarters following the interest rate increase.

Countries that have high external debt such as India, Malaysia and Indonesia will see a slower capital inflow. The three markets have posted steadily rising ratio of short-term external debt/foreign exchange reserves, corporate debt/foreign exchange reserves, and total external debt/foreign exchange reserves. 

These ratios are much higher than in other Asian nations, therefore, we give an underweight rating for Indonesia and Malaysia markets.

This article appeared in the Hong Kong Economic Journal on May 11.

Translation by Julie Zhu

[Chinese version 中文版]

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Asia Pacific chief investment officer at Credit Suisse