Asia Economic and Bond Outlook - Q1 2010
By: Kheng Siang Ng, CFA, CAIA, Head of Asian Fixed Income
Nigel Foo, CFA, Investment Manager
December 31, 2009
Main Themes of Current Market Expectations
•
Asian economic recovery is expected to continue as exports have started to rebound with recovery in global demand as well as benefitting from earlier fiscal and monetary stimulus measures.
•
Improved economic confidence, rising equity and housing markets are expected to further support domestic consumption.
•
Narrowing output gap, basis effect, higher energy, food and commodity prices are expected to lead to higher inflation 2010 from a low base in 2009.
•
Policymakers will face the challenge of balancing growth with rising inflationary pressures against the backdrop of an uncertain global economic outlook.
•
Asian central banks are expected to reduce monetary stimulus via reduction in excess liquidity in the system and rate hikes to normalize policy rates.
•
Asian bond yields are expected to trend higher over the next few months in response to tighter monetary policy.
•
Asian currencies are expected to post moderate appreciation in Q1 on favourable growth and interest rate differentials against developed economies as well as continued capital inflow into Asia.
We expect Asian bonds in general to outperform their US counterparts even as Asian central banks are expected to begin raising rates possibly in Q1 of 2010. Asian currency appreciation is expected to provide sufficient buffer to the moderate rise in bond yields. We also expect further investor diversification away from developed bond markets to Asia will tilt the balance in favour of Asian local currency bonds.
Outlook by Country
CHINA
China’s 2010 growth outlook remains positive as we expect it to hit 9%. However, we are likely to see significant changes in the contribution mix with investment sharply falling, offset by continued recovery in exports, while consumption will likely remain stable. During the recent Central Economic Work Conference, the message was clear that the government should strictly control new project starts
1 . Thus, we believe investment will see a major decline as the government will likely slow the Deutsche Bank Research, 17 December 2009. pace of new project approvals and delay or even cancel some projects that are not started. The year 2010 will also see the government focus more on structural issues such as the widening the income gap between urban and rural workers.
Inflation will likely move up fairly quickly on rising food prices. We expect it to be around 2-3% for the first quarter and an average of 3-4% for the full year. Risks on the upside include rising oil price and a continued surge in property prices. We expect the People’s Bank of China to hike interest rates in the second half of the year though not in an aggressive manner unless inflationary pressure heightens dramatically from current levels. Monetary policies will likely focus on curbing banks’ loan growth and administrative measures to cool down the property market. We also do not think the Chinese will budge to external pressures to strengthen the yuan. We expect slight appreciation in the first quarter and for the full year we are looking at a 3% gain to around the 6.62 level. We remained bearish on the bond market on rising inflationary expectations though we do not expect market to be sold off dramatically from current levels.
HONG KONG
This global economic crisis has reinforced our belief that as an entrepot, Hong Kong’s growth is mainly influenced by external demand factors. Growth looks promising in the near term as the developed economies, namely the US and Europe, continue to recover from their lows. However, visibility beyond that is low especially when fiscal and monetary stimuli are expected to be removed globally albeit in a gradual manner. Nonetheless, we are expecting a fairly robust growth of 6% for Hong Kong in 2010, driven largely by strong recovery in trading for the first half and strong domestic consumption boosted by rising stock and property markets.
Just like the rest of Asia, we expect inflation in Hong Kong to head higher from its low base and amid rising food and commodity prices. We expect headline inflation to hit 3-4% in the first quarter.
Housing price inflation could pose a threat to price stability though we do not view its impact as that damaging at this point.
HKD has remained stubbornly on the strong side of the 7.75-7.85 band due to strong inflows and we expect that trend to continue though we see some easing moving into 2010. We maintain no change to the currency peg for a foreseeable future. We remain bearish on Hong Kong bonds in view of the “normalization” of rates as ultra loose monetary conditions are gradually removed in the US.
MALAYSIA
We expect exports to provide strong support to growth in the first half of 2010 though the government’s determination to reduce the budget deficit greatly increases the uncertainty for full year growth, especially in view that the export recovery might stall in the second half of the year. As such, we are maintaining our 3-4% growth forecast for 2010 with much hinging on how aggressive the government is in tightening spending.
Inflation is likely to rise quickly in the coming months and should hit around 2.5% in the first quarter.
Barring shocks to food and commodity prices, we do not expect Bank Negara Malaysia to react to the anticipated rise in inflation as it aims to balance the prospects on recovering exports and lower government expenditure. As the central bank is the least aggressive in this region in terms of slashing policy rates, we expect it to be the least aggressive as well when it comes to hiking. Thus we see no change in policy rate for the whole of 2010.
As a result of government’s plan to reduce the budget deficit, bond issuance is expected to drop by 30%, coupled with no rate hike in sight, this should be bond supportive. The ringgit is expected to show modest strength to appreciate to around 3.4000 in Q1 2010, in line with other regional currencies.
THAILAND
Rising exports and supportive fiscal policy should enable Thailand to deliver growth close to 5.5% in 2010 though we cannot stress often enough the uncertain political landscape is once again the weak link in our growth forecast.
Sustained growth and rising inflation (which we expect to average 4-5% for 2010) will likely lead to rate hikes by the Bank of Thailand in the second half of 2010 in the region of around 50-75 basis points. The bond market is pricing in fairly aggressive rate hikes amid a significant increase in duration for the government bond supply in 2010. 2 . We think long end bonds would be attractive should yields rise by another 50 basis points. Thai Baht has been relatively stable versus its Asian peers especially in the second half of 2009. Barring a dramatic change in political outlook, we expect the stability to continue and for the Thai Baht to strengthen modestly to around 33.10 in line with Asian currencies in Q1 2010.
INDONESIA
The Indonesian economy has shown remarkable resilience in terms of maintaining encouraging growth in 2009 and we expect this trend to continue as headwinds to global growth are subsiding. Robust domestic consumption and an increase in government investment spending in the coming year will likely be the key drivers of growth. The challenge for the government is maintain the momentum of positive investor sentiment towards Indonesia and attract long-term foreign direct investments into the country. We expect GDP to grow at 5% to 5.5% in 2010 from 4.3% estimated for 2009.
The inflation rate is currently around 2.4% year-over-year at record low levels. However, we do not expect this to remain as pending administrative price adjustments (including toll road, fuel, electricity and LPG) 4 will narrow the output gap as economic growth increases and basis effect from the previous year will likely lead to rising inflationary pressure.
We expect CPI to rise to an average of 5.5% to 6% in 2010. As economic recovery gains further strength, macroeconomic policy management will turn from one of growth into more of balancing growth with rising inflationary pressures. We expect Bank Indonesia to keep rates on hold in Q1 2010, but may raise rate by 50 basis points in Q2 to 7.00%. The rupiah bonds may trade sideways with near term buying from foreign investors on the attraction of carry in the bond market, but yields are expected to rise over the medium term. We expect the IDR to remain well bid with improving fundamentals, likely to reach 9300 by the end of Q1.
SOUTH KOREA
Export growth, which has been stronger than expected at 18.8% year-over-year , may continue to propel economic growth further as manufacturers continue to rebuild inventory as export demand picks up. Investment spending is expected to increase as manufacturers increase production capacity to respond to higher output demand. The front loaded fiscal stimulus by the government at the start of 2009 is expected to slowly wane and the government is prepared for supplementary budget should economic growth slow down in early 2010. We expect growth in 2010 to reach around 4.5% from -1% in 2009.
The rapid money supply growth at 10.5% year-over-year 6 showed that bank lending has been at a brisk pace and this was the reason behind the strong housing market that became a concern for the authorities for fear of further build up in real estate property bubble. Overall inflation may rise from current level of 2.4% year-over-year 7 to around 3.5% in 2010. While this is still within the Bank of Korea’s revised inflation target range of 2%-4% 8 for 2010 to 2012 period, we believe the Bank of Korea is likely to start hiking rates in Q1 by 50 to 75 basis points from current 2% level.
The bond market has largely priced the rate hike Bank of Korea is expected to deliver in the first half of 2010 and further signs of improvement in growth would lead to further sell-off in the bond market with curve flattening move. Our expectation is that higher GDP growth and expected tightening would see the KRW strengthen to 1130 by the end of Q1.
SINGAPORE
The highly open economy of Singapore is expected to reap strong benefits from the rebound in global
demand and hence its exports will be a strong contributor to growth. Continuing construction output
coming from both the integrated resorts due to open in 2010 as well as robust residential construction
demand would further underpin growth as domestic consumption picks up following improvement in
equity and labour markets. We expect reduced fiscal stimulus measures as the economy is on a
recovery path, but uncertainty in the growth outlook (that may lead to disappointment in exports
growth) and a possible election to be held within 1 to 2 years may see some measures aimed at
expanding the social safety net and lifting long-term economic and income growth. We expect GDP to
grow at close to 5.5% in 2010 from a weak -1.5% in 2009.
Strong recovery in economic growth, higher commodity prices, upward revision in valuation of public
housing and basis effect will likely lead to higher inflationary pressures in the coming months. We
expect CPI to rise to around average of 3% in 2010 from 0.5% in 2009.
With incipient inflationary pressures, the Monetary Authority of Singapore (MAS) is expected to guide
the nominal effective exchange rates of the currency to the appreciating bias in the coming April
monetary policy meeting. The stronger SGD currency will help to keep imported inflation in check and
further sterilization of capital inflows would see interest rates go up. We are bearish on SGD bonds as
tightening policy moves by MAS and expected higher US Treasuries yields are expected to lead to
weaker bond performance. We expect SGD to trade towards 1.3800 by the end of Q1.
PHILIPPINES
After an expected lacklustre growth of 1.5% due to the typhoon as the economy tried to recover in
2009, the Philippine economy is expected bounce back to 4% growth in 2010. The key pillars of
growth in 2010 will be the robust overseas worker remittance and present low interest rates that are
expected to support domestic consumption as well as government spending ahead of the May 2010
Presidential election. The government’s fiscal deficit position has deteriorated to an expected PHP300
billion for the full year of 2009 and this is unlikely to change much in an election year of 2010 with the
9
risk that deficit could widen . The government is expected to step up its efforts to raise finance
through overseas bond issuance in 2010. 10 We do not expect major negative shocks from the election,
but the new President’s credibility and ability in translating election promised reforms into actual
implementation may be key to lifting growth and reducing a future budget deficit.
The ultra low inflation level achieved at 0.1% in August 2009 11 has turned convincingly since then.
Similar drivers of inflation seen elsewhere in Asia as growth recovers, excess liquidity, higher oil and
energy prices and more notably food/agriculture prices in the Philippines are pushing inflation to trend
up. The CPI is expected to rise to an average of 5% in 2010, higher than the central bank forecast of
average 4%. 12
Against the backdrop of election year and a rising inflation trend, Bangko Sentral ng Pilipinas (BSP)
will likely withdraw the liquidity measures first in exiting monetary stimulus before raising the official
interest rates. This may likely lead to higher bond yields, especially for bonds in the long end, given
the fiscal deficits dynamics. The PHP may be range bound around 46 to 47.5 with potential for
weakness in Q1 ahead of election in May.
This material is for your private information.
The views expressed in this material are the views of Kheng Siang Ng and Nigel Foo through the period ended
December 31, 2009 and is subject to change based on market and other conditions. The information provided
does not constitute investment advice and it should not be relied on as such. All material has been obtained from
sources believed to be reliable, but its accuracy is not guaranteed. This content contains certain statements that
may be deemed forward-looking statements. Please note that any such statements are not guarantees of any
future performance and actual results or developments may differ materially from those projected.
Past performance is no guarantee of future results
SSgA may have or may seek investment management or other business relationships with companies discussed
in this material or affiliates of those companies, such as their officers, directors and pension plans. INTR-0113
2009 State Street Corporation - All Rights Reserved
By: Kheng Siang Ng, CFA, CAIA, Head of Asian Fixed Income
Nigel Foo, CFA, Investment Manager
December 31, 2009
Main Themes of Current Market Expectations
•
Asian economic recovery is expected to continue as exports have started to rebound with recovery in global demand as well as benefitting from earlier fiscal and monetary stimulus measures.
•
Improved economic confidence, rising equity and housing markets are expected to further support domestic consumption.
•
Narrowing output gap, basis effect, higher energy, food and commodity prices are expected to lead to higher inflation 2010 from a low base in 2009.
•
Policymakers will face the challenge of balancing growth with rising inflationary pressures against the backdrop of an uncertain global economic outlook.
•
Asian central banks are expected to reduce monetary stimulus via reduction in excess liquidity in the system and rate hikes to normalize policy rates.
•
Asian bond yields are expected to trend higher over the next few months in response to tighter monetary policy.
•
Asian currencies are expected to post moderate appreciation in Q1 on favourable growth and interest rate differentials against developed economies as well as continued capital inflow into Asia.
We expect Asian bonds in general to outperform their US counterparts even as Asian central banks are expected to begin raising rates possibly in Q1 of 2010. Asian currency appreciation is expected to provide sufficient buffer to the moderate rise in bond yields. We also expect further investor diversification away from developed bond markets to Asia will tilt the balance in favour of Asian local currency bonds.
Outlook by Country
CHINA
China’s 2010 growth outlook remains positive as we expect it to hit 9%. However, we are likely to see significant changes in the contribution mix with investment sharply falling, offset by continued recovery in exports, while consumption will likely remain stable. During the recent Central Economic Work Conference, the message was clear that the government should strictly control new project starts
1 . Thus, we believe investment will see a major decline as the government will likely slow the Deutsche Bank Research, 17 December 2009. pace of new project approvals and delay or even cancel some projects that are not started. The year 2010 will also see the government focus more on structural issues such as the widening the income gap between urban and rural workers.
Inflation will likely move up fairly quickly on rising food prices. We expect it to be around 2-3% for the first quarter and an average of 3-4% for the full year. Risks on the upside include rising oil price and a continued surge in property prices. We expect the People’s Bank of China to hike interest rates in the second half of the year though not in an aggressive manner unless inflationary pressure heightens dramatically from current levels. Monetary policies will likely focus on curbing banks’ loan growth and administrative measures to cool down the property market. We also do not think the Chinese will budge to external pressures to strengthen the yuan. We expect slight appreciation in the first quarter and for the full year we are looking at a 3% gain to around the 6.62 level. We remained bearish on the bond market on rising inflationary expectations though we do not expect market to be sold off dramatically from current levels.
HONG KONG
This global economic crisis has reinforced our belief that as an entrepot, Hong Kong’s growth is mainly influenced by external demand factors. Growth looks promising in the near term as the developed economies, namely the US and Europe, continue to recover from their lows. However, visibility beyond that is low especially when fiscal and monetary stimuli are expected to be removed globally albeit in a gradual manner. Nonetheless, we are expecting a fairly robust growth of 6% for Hong Kong in 2010, driven largely by strong recovery in trading for the first half and strong domestic consumption boosted by rising stock and property markets.
Just like the rest of Asia, we expect inflation in Hong Kong to head higher from its low base and amid rising food and commodity prices. We expect headline inflation to hit 3-4% in the first quarter.
Housing price inflation could pose a threat to price stability though we do not view its impact as that damaging at this point.
HKD has remained stubbornly on the strong side of the 7.75-7.85 band due to strong inflows and we expect that trend to continue though we see some easing moving into 2010. We maintain no change to the currency peg for a foreseeable future. We remain bearish on Hong Kong bonds in view of the “normalization” of rates as ultra loose monetary conditions are gradually removed in the US.
MALAYSIA
We expect exports to provide strong support to growth in the first half of 2010 though the government’s determination to reduce the budget deficit greatly increases the uncertainty for full year growth, especially in view that the export recovery might stall in the second half of the year. As such, we are maintaining our 3-4% growth forecast for 2010 with much hinging on how aggressive the government is in tightening spending.
Inflation is likely to rise quickly in the coming months and should hit around 2.5% in the first quarter.
Barring shocks to food and commodity prices, we do not expect Bank Negara Malaysia to react to the anticipated rise in inflation as it aims to balance the prospects on recovering exports and lower government expenditure. As the central bank is the least aggressive in this region in terms of slashing policy rates, we expect it to be the least aggressive as well when it comes to hiking. Thus we see no change in policy rate for the whole of 2010.
As a result of government’s plan to reduce the budget deficit, bond issuance is expected to drop by 30%, coupled with no rate hike in sight, this should be bond supportive. The ringgit is expected to show modest strength to appreciate to around 3.4000 in Q1 2010, in line with other regional currencies.
THAILAND
Rising exports and supportive fiscal policy should enable Thailand to deliver growth close to 5.5% in 2010 though we cannot stress often enough the uncertain political landscape is once again the weak link in our growth forecast.
Sustained growth and rising inflation (which we expect to average 4-5% for 2010) will likely lead to rate hikes by the Bank of Thailand in the second half of 2010 in the region of around 50-75 basis points. The bond market is pricing in fairly aggressive rate hikes amid a significant increase in duration for the government bond supply in 2010. 2 . We think long end bonds would be attractive should yields rise by another 50 basis points. Thai Baht has been relatively stable versus its Asian peers especially in the second half of 2009. Barring a dramatic change in political outlook, we expect the stability to continue and for the Thai Baht to strengthen modestly to around 33.10 in line with Asian currencies in Q1 2010.
INDONESIA
The Indonesian economy has shown remarkable resilience in terms of maintaining encouraging growth in 2009 and we expect this trend to continue as headwinds to global growth are subsiding. Robust domestic consumption and an increase in government investment spending in the coming year will likely be the key drivers of growth. The challenge for the government is maintain the momentum of positive investor sentiment towards Indonesia and attract long-term foreign direct investments into the country. We expect GDP to grow at 5% to 5.5% in 2010 from 4.3% estimated for 2009.
The inflation rate is currently around 2.4% year-over-year at record low levels. However, we do not expect this to remain as pending administrative price adjustments (including toll road, fuel, electricity and LPG) 4 will narrow the output gap as economic growth increases and basis effect from the previous year will likely lead to rising inflationary pressure.
We expect CPI to rise to an average of 5.5% to 6% in 2010. As economic recovery gains further strength, macroeconomic policy management will turn from one of growth into more of balancing growth with rising inflationary pressures. We expect Bank Indonesia to keep rates on hold in Q1 2010, but may raise rate by 50 basis points in Q2 to 7.00%. The rupiah bonds may trade sideways with near term buying from foreign investors on the attraction of carry in the bond market, but yields are expected to rise over the medium term. We expect the IDR to remain well bid with improving fundamentals, likely to reach 9300 by the end of Q1.
SOUTH KOREA
Export growth, which has been stronger than expected at 18.8% year-over-year , may continue to propel economic growth further as manufacturers continue to rebuild inventory as export demand picks up. Investment spending is expected to increase as manufacturers increase production capacity to respond to higher output demand. The front loaded fiscal stimulus by the government at the start of 2009 is expected to slowly wane and the government is prepared for supplementary budget should economic growth slow down in early 2010. We expect growth in 2010 to reach around 4.5% from -1% in 2009.
The rapid money supply growth at 10.5% year-over-year 6 showed that bank lending has been at a brisk pace and this was the reason behind the strong housing market that became a concern for the authorities for fear of further build up in real estate property bubble. Overall inflation may rise from current level of 2.4% year-over-year 7 to around 3.5% in 2010. While this is still within the Bank of Korea’s revised inflation target range of 2%-4% 8 for 2010 to 2012 period, we believe the Bank of Korea is likely to start hiking rates in Q1 by 50 to 75 basis points from current 2% level.
The bond market has largely priced the rate hike Bank of Korea is expected to deliver in the first half of 2010 and further signs of improvement in growth would lead to further sell-off in the bond market with curve flattening move. Our expectation is that higher GDP growth and expected tightening would see the KRW strengthen to 1130 by the end of Q1.
SINGAPORE
The highly open economy of Singapore is expected to reap strong benefits from the rebound in global
demand and hence its exports will be a strong contributor to growth. Continuing construction output
coming from both the integrated resorts due to open in 2010 as well as robust residential construction
demand would further underpin growth as domestic consumption picks up following improvement in
equity and labour markets. We expect reduced fiscal stimulus measures as the economy is on a
recovery path, but uncertainty in the growth outlook (that may lead to disappointment in exports
growth) and a possible election to be held within 1 to 2 years may see some measures aimed at
expanding the social safety net and lifting long-term economic and income growth. We expect GDP to
grow at close to 5.5% in 2010 from a weak -1.5% in 2009.
Strong recovery in economic growth, higher commodity prices, upward revision in valuation of public
housing and basis effect will likely lead to higher inflationary pressures in the coming months. We
expect CPI to rise to around average of 3% in 2010 from 0.5% in 2009.
With incipient inflationary pressures, the Monetary Authority of Singapore (MAS) is expected to guide
the nominal effective exchange rates of the currency to the appreciating bias in the coming April
monetary policy meeting. The stronger SGD currency will help to keep imported inflation in check and
further sterilization of capital inflows would see interest rates go up. We are bearish on SGD bonds as
tightening policy moves by MAS and expected higher US Treasuries yields are expected to lead to
weaker bond performance. We expect SGD to trade towards 1.3800 by the end of Q1.
PHILIPPINES
After an expected lacklustre growth of 1.5% due to the typhoon as the economy tried to recover in
2009, the Philippine economy is expected bounce back to 4% growth in 2010. The key pillars of
growth in 2010 will be the robust overseas worker remittance and present low interest rates that are
expected to support domestic consumption as well as government spending ahead of the May 2010
Presidential election. The government’s fiscal deficit position has deteriorated to an expected PHP300
billion for the full year of 2009 and this is unlikely to change much in an election year of 2010 with the
9
risk that deficit could widen . The government is expected to step up its efforts to raise finance
through overseas bond issuance in 2010. 10 We do not expect major negative shocks from the election,
but the new President’s credibility and ability in translating election promised reforms into actual
implementation may be key to lifting growth and reducing a future budget deficit.
The ultra low inflation level achieved at 0.1% in August 2009 11 has turned convincingly since then.
Similar drivers of inflation seen elsewhere in Asia as growth recovers, excess liquidity, higher oil and
energy prices and more notably food/agriculture prices in the Philippines are pushing inflation to trend
up. The CPI is expected to rise to an average of 5% in 2010, higher than the central bank forecast of
average 4%. 12
Against the backdrop of election year and a rising inflation trend, Bangko Sentral ng Pilipinas (BSP)
will likely withdraw the liquidity measures first in exiting monetary stimulus before raising the official
interest rates. This may likely lead to higher bond yields, especially for bonds in the long end, given
the fiscal deficits dynamics. The PHP may be range bound around 46 to 47.5 with potential for
weakness in Q1 ahead of election in May.
This material is for your private information.
The views expressed in this material are the views of Kheng Siang Ng and Nigel Foo through the period ended
December 31, 2009 and is subject to change based on market and other conditions. The information provided
does not constitute investment advice and it should not be relied on as such. All material has been obtained from
sources believed to be reliable, but its accuracy is not guaranteed. This content contains certain statements that
may be deemed forward-looking statements. Please note that any such statements are not guarantees of any
future performance and actual results or developments may differ materially from those projected.
Past performance is no guarantee of future results
SSgA may have or may seek investment management or other business relationships with companies discussed
in this material or affiliates of those companies, such as their officers, directors and pension plans. INTR-0113
2009 State Street Corporation - All Rights Reserved