Published February 8, 2012
A roundtable was told last week that 'markets are far too optimistic about the global economy', reports TEH HOOI LING
ONE should still be cautious about the prospects for the Asian markets this year as there are so many political and economic flash points, with many of them threatening to reach danger points spontaneously, said Manu Bhaskaran, partner and head of economic research at Centennial Group, at a roundtable organised by CFA Singapore last week. 'It's very difficult to argue that most of these will turn out honky-dory,' he told senior members of the society who are primarily investment professionals.
Among the key political flash points in the Middle East are the Iran nuclear standoff reaching a tense point, Syria tumbling into a civil war, and Iraq's security and political stability crumbling. All these will lead to a rising risk premium in oil prices. So the price of oil will be higher than where it should be, based purely on demand and supply.
Economically, there are likely to be surprises on the downside. 'Markets are far too optimistic about the global economy,' said Mr Bhaskaran. There is a huge political drag and fiscal drag in the United States. Unless the housing market recovers far more strongly than expected, the US will deliver sub-par growth in 2012 and even worse in 2013 - the recent positive job numbers notwithstanding.
Meanwhile, the eurozone is in a completely untenable situation. 'The delicate arrangement of policies to buy time by eurozone leaders will not survive the grinding effects of a worsening recession in the region, which will trigger political and financial stresses,' he said.
In Asia, the political flash points are in North Korea, Pakistan and Malaysia. There is a greater likelihood of a troubled transition in North Korea than markets think.
In Pakistan, according to Mr Bhaskaran's assessment, there will almost certainly be a military-inspired change of government under the guise of a parliamentary manoeuvre. Violence which ebbed a little in 2011 compared to 2010 will rise again, and many parts of the country will be out of Islamabad's control. This will have huge negative implications for India.
Meanwhile, in Malaysia, investors should watch out for election risks. The baseline scenario is that Prime Minister Najib Razak may be able to contain the losses of Umno/Barisan Nasional to around 10-15 seats - which would still give him a strong majority in Parliament, although not two-thirds. But this would not be strong enough a victory to firm Mr Najib's grip on Umno, and chances are he will stumble along, unable to implement his reforms.
On the economic front, Mr Bhaskaran noted that there are some key differences between the 2008 slowdown and the current one which are not positive for Asia. First, the current slowdown is due to a combination of slower growth in global demand brought about by adjustments in the G-3 economies and ongoing financial stresses in Europe and perhaps in China.
No massive policy responses
This time around, G-3 and China are unlikely to engage in massive policy responses. Hence the slowdown will not be the relatively short one we experienced in 2008-09.
Meanwhile, the political mood in G-3 is more sour now, making them less friendly to Asian economies.
All this means that adjustment mechanisms that did not kick in in 2008-09 could kick in now - adjustments like retrenchments, an interruption in the flow of remittances from urban to rural, reduced deployment of overseas workers and a reduction in remittance flows, as well as protectionism.
On the positive side, there is expanding regional integration, reopening of Myanmar, and increased infrastructure spending across many countries.
As for China, it could be a source of unpleasant surprises. Mr Bhaskaran sees China at risk of one or two quarters of sub-par growth, accompanied by financial and political stresses. A number of imbalances and structural adjustments that have been building in recent years are unravelling just as the external slowdown hits.
Among the imbalances are: a huge monetary overhang of around 30 percentage points of GDP; speculative bubbles, of which property is only one; large debts in certain parts of the economy such as local government and SMEs; substantial growth of illegal lending; and rising wage, land and other costs.
Mr Bhaskaran is of the view that the Chinese leaders have the ability to mitigate a slowdown but not to prevent one from starting.
As for India, it is also likely to face a sharp slowdown in investment caused by tight money; worsening infrastructure bottlenecks, especially in power; and rising fiscal challenges.
Singapore will face multiple challenges this year. Its export structure is heavily geared towards the G-3 markets directly and indirectly. Its financial sector will take a hit from the cyclical downturn in financial activities as well as the longer-term definancialisation as financial activities adjust to tighter regulation, tougher capital adequacy rules and hostile politics.
At the same time, it has to deal with domestic adjustments. Wage costs are rising because of tighter rules on foreign worker inflows, office and commercial rents have continued to rise, its strengthening currency is reducing its competitiveness, and the property cooling measures will reduce real estate-related service activity as well as investment.
Deflationary adjustments
'In the scenario of a prolonged slowdown, and given that the Monetary Authority of Singapore is unlikely to allow a material nominal depreciation of the Singapore dollar, domestic costs will have to adjust down. We will have to endure deflationary adjustments as we experienced in 2001-2003,' said Mr Bhaskaran. 'This may become more evident in the later part of this year and 2013.'
Under this scenario, the Singapore government will need to use monetary and fiscal policy to tackle the situation. The April monetary policy recalibration should be a one-off nominal depreciation and a shift towards a no-appreciation policy.
On the fiscal front, there is room to accelerate infrastructure spending. A modified form of the Jobs Credit Scheme should also be implemented together with a reintroduction of support measures for credit extension to small/medium enterprises such as the risk-sharing initiative.
The roundtable ended with the participants sharing their investment ideas for this year.
Among the ideas are:
* buy China equities; improvements in liquidity and policies are enough to drive markets when valuations are at very attractive levels;
* buy blue-chip global firms listed in the US as they have been beaten down pretty hard;
* stay defensive by going for high-yielding stocks as Singapore enters into a recession;
* short euro; long precious metals; and
* invest in private equity funds.
No comments:
Post a Comment