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of the year, especially on the export and pri- ance sheets of Asian sovereigns and corporate also because it is being disbursed earlier than
vate investment fronts despite the recent are among the strongest in the emerging mar- others. Beyond the direct fiscal stimulus,
acceleration in credit and money growths. kets universe. China is one of the rare countries which had
Overall, Asian growth is likely to reach 3/3.5% Once global risk appetite returns, the rally in launched – and can afford to launch – indus-
only with Chinese growth falling to around Asian markets will likely outperform both G7 try specific measures (especially in the car
6.5/7% (significantly below the official target countries and other emerging market regions industry, real estate and banking sectors).
of 8%), and Indian growth also moderating to -we are clearly not at this stage yet. In the While we remain sceptical about the final
around 5%. Counter-cyclical fiscal policy will short term, the irony is that the macro future impact of these measures, we acknowledge
provide some cushion for the sharply deterio- of Asia’s financial markets is not in Asian that China is better-positioned than most
rating growth outlook, but few countries in hands. emerging markets to implement such a mas-
Asia can afford broad-based fiscal stimulus. Although we are convinced that a broad- sive and broad-based stimulus. We are also
China has better resources than most emerg- based Asian rally is unlikely as long as global aware that the short-term boost will not come
ing markets to prevent a long-lasting hard risk appetite remains depressed, some regional without medium-term costs: declining effi-
landing, but it will not be sufficient to save the macro themes are expected to play a signifi- ciency of investment, further distortion of
entire region. cant role in determining Asian prospects for China’s growth profile and higher NPLs down
Inflation has been falling sharply across 2009. the road. Still stimulus is stimulus and China
Asia, driven mainly by collapsing food and The meltdown of 2008 was undiscriminat- has much more firepower than any other
energy prices. We expect average inflation in ing – all countries suffered, across all sectors. country in this regard.
Asia will fall toward 2% in 2009 (much less if With Asia’s macro outlook expected to deteri- Should China manage to at least partially
we remove India, Indonesia and the orate further in coming months, divergent cushion the negative impact of the financial
Philippines from the list), led by significant sector performances should once again play a crisis through these various stimuli, it is
overcapacity. We anticipate aggressive interest key role in the search for new investment unlikely to trigger a broad-based Asian equity
rate cuts will continue in most Asian coun- opportunities. In this piece we focus our rally. Instead, we would anticipate a significant
tries, even ones with persistently high inflation attention on a specific one: Asian fiscal stimu- outperformance of infrastructure-related
such as Indonesia and India. lus efforts, and its impact on stock market stocks, ranging from utilities to materials.
On the currency front, the global deleverag- performances, especially in mainland China. Over the longer-term, but over the longer
ing has been the dominant driver of financial Monetary and fiscal stimulus efforts in term only, the acceleration in social reforms
flows, and has generated much stronger most Asian countries are much more recent should help decrease precautionary savings
exchange rate correlations across emerging than in the United States. It is too early to tell and boost consumption. However, in the short
market currencies. Although we expect Asian whether the attempts to partially cushion the term, we continue to expect Chinese domestic
currencies to remain weak against USD in the blow from sharply contracting exports will consumption will fall in the first half of 2009
short term, as long as global demand for Asian succeed. In any case, the potential positive and Chinese growth will be driven mainly by
goods remains depressed, the region’s impact of the fiscal stimulus on infrastruc- public investment.
exporters will not benefit from gains in price ture-related asset prices is not currently fully The sharply decelerating inflation should
competitiveness. Asian currencies might priced in by the markets, not because of also benefit infrastructure-related stocks in
appear undervalued, but a broad-based rally is investor scepticism, but rather because it is China. Despite much lower demand on the
unlikely in the short term even though funda- still very new and tenuous. Broadly speaking, back of sluggish economic growth, these sec-
mentals have not materially changed. Asian Central Banks only started cutting rates tors have been more resilient than others as
Finally, we expect the RMB to remain stable five months ago, roughly one year after the input prices have also tumbled. A rapid disin-
against USD. We do not buy the sharp devalu- Fed’s easing cycle began, and fiscal stimulus flation process, not a regional deflation sce-
ation scenario for at least four reasons. (i) packages were only announced across Asia nario, should help these sectors. If the
First, a weaker RMB would have little impact over the last couple of months. disinflation process deteriorates into pro-
on exports. Chinese exports do not suffer Most Asian countries still have plenty of longed deflation risk, very few sectors will be
from a lack of competitiveness, but rather monetary stimulus ammunition, and we deflation-proof. Even so, these sectors should
from the sharply contracting consumer expect even more aggressive rate cuts and big- outperform others as they would benefit from
demand globally. (ii) If China were to devalue ger than expected fiscal packages down the relatively sticky output prices (fixed or con-
its currency, the risks of competitive devalua- road. tracted prices) and less cyclical revenues.
tions across Asian countries are real and Moreover, most of this fiscal stimulus has Overall, this infrastructure play appears set to
would bring back painful memories of past not been fully disbursed yet (16% of GDP in benefit the most from the fiscal stimulus, and
global recession episodes. (iii) Devaluing the China. We remain sceptical about the amount yet seems to be the least exposed to deflation
currency would accelerate the pace of capital of new money in this package - 8% in risk.
outflows from China, which would be a disas- Singapore, about 4% in Taiwan, Korea and the Asian growth and inflation are collapsing.
ter as China tries to revamp its financial mar- Philippines, and around 1% of GDP in more The worst is not behind us. Overall, the fate of
kets. (iv) Finally, this could trigger a fiscally-constrained countries such as India, Asia still lies in far away hands. We expect no
significant protectionist backlash from the US Malaysia, and Thailand). broad based rally as long as global risk
and the EU. appetite remains depressed. However, we
Implementing success expect more discrimination than in 2008 and
No Broad-based Rally but The ultimate success of these new measures more discrepancy among sectors.
Some Selective Opportunities will depend on the traction they receive and Infrastructure-related assets are likely to out-
In our view, it is still too early to play two the timing of implementation on a country perform under this scenario of rising govern-
well-known fundamental themes in Asia: (i) specific basis. Moreover, China’s fiscal stimu- ment investment spending combined with
Asia will account for the vast majority of lus will be key in this regard; not only because rapid disinflation. Under such a scenario,
global growth in the years to come, even of its sheer size and because other Asian coun- China is likely to outperform other Asian
under an Asia hard landing scenario; (ii) bal- tries are much more fiscally constrained, but countries.
April 2009 Investment International www.investmentinternational.com
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