International | May 16 2006
By Chris Shaw (Tokyo)
At the same time as profit taking has hit the Australian market thanks to weakness in commodity prices and the US market is showing signs of topping-out thanks to interest rate and currency concerns, DBS suggests Asian markets may also be entering a flat period.
DBS suggests stocks in the region may well take a breather in the current quarter as valuations have now returned to more normal levels, while there are an increasing number of factors clouding the short-term outlook.
These include the potential for interest rates to move higher in the region as inflation picks up, DBS noting it is becoming a problem in markets such as Indonesia, the Philippines, Thailand and now Malaysia thanks in part to ongoing strength in energy prices. With the Asian economies also sensitive to US interest rates, further increases in US rates could also have an impact on growth.
DBS notes political risk is also on the increase in the Philippines and Thailand, while there remains the potential for some downside risk to GDP numbers in some economies. For Asia generally the analysts suggest growth will be driven by the results from China and Japan, which have both been performing strongly. Additionally they see benefits from currency strength in response to a weaker US currency.
Longer-term the outlook for Asia remains healthy according to Paul Calello, CEO of Credit Suisse Asia Pacific, who suggests growth in the region has yet to peak. Emphasising the region’s prospects in an interview with an online newsletter published by his employer, Calello notes more than US$13bn has been invested in the region so far this year by international investors.
He agrees with DBS’s assessment of the short-term risks though, pointing to rising interest rates and energy prices as reasons for caution in coming months.
DBS suggests investors in the region should focus on the defensive markets, so it is retaining its overweight rating on Singapore. At the same time it is upgrading Malaysia to a tactical overweight rating, suggesting the recent weakness there has been overdone.
In contrast it suggests an underweight position in Indonesia is appropriate given valuations there continue to be stretched, while the inflationary outlook and the potential for a slowdown in consumer spending suggests there is downside risk to growth.
DBS has neutral ratings on Thailand thanks to its political uncertainty and Hong Kong thanks to the strong returns it generated in the first quarter. Calello is also cautious on the outlook for China, as while he believes longer-term the transformation of the economy into a market-based system will succeed, the current tightening being introduced to limit excess liquidity may result in a period of adjustment.
Within its preferred markets of Singapore and Malaysia DBS likes bank, telecommunications and energy stocks in the former and more defensive sectors such as gaming, tobacco and power stocks in the latter.
