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Asia-Pacific

Does Asia Have More Legs to Run?

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Recent USD strength and softness in equities, particularly in HK/China, have raised some alarm among investors. China’s central bank scaling back stimulus ‎may ‎have also contributed to this cautiousness. Citi’s view however is that the central bank is growing more confident of a recovery in growth, though it remains still too early to consider tightening.

 

 

Whilst Citi analysts see some headwinds as we enter into the summer low volume months, there are reasons to believe that the recovery in Asia may last through 2019:

 

  • Commodity prices have rebounded by 9% according to the CRB industrial metals index, which indicated a bottom in earnings growth in 2Q. At current levels, metals prices are consistent with nearly 10% EPS growth in 2019, which is double the consensus of 5%.

 

  • When the rebound in activity is coupled with supportive global monetary policy, as in 2016, it tends to last longer than periods of significant policy uncertainty (2011-13). The initial recovery may have been driven by inventory restocking following the excessive destocking in 2018, and which is likely to be followed by some recovery in final demand supported by improved credit conditions. Export activity and earnings tend to follow the PMI rebound.

 

  • The semiconductor cycle exacerbated market weakness last year, but the destocking process is wrapping up. This has been a major drag on earnings expectations in Asia so far, but which is likely to recover this year. While semiconductor equities have reached new highs in the US, their Asian counterparts still lag. Citi analysts expect some catch up.

 

  • Policymakers seem less concerned about inflation currently as evidenced by falling market based inflation expectations measures and therefore feel less compelled to maintain stronger exchange rates. As a result, local monetary policy can be either put on hold or become more accommodative via further dovish forward guidance or additional easing to support further economic growth.

 

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This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
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