International | Jun 18 2008
By Chris Shaw
Standard Chartered sent a group of its analysts to Hong Kong to meet with clients and came away with some conclusions as to how investors in that part of the world generally see the outlook with respect to what policy actions the US Federal Reserve is likely to follow, how investors in Asia are positioning themselves as a result and just what are the growth prospects for the Asian region.
In terms of the former Standard Chartered notes the dominant view is while the Fed may talk the talk it is unlikely to walk the walk. A number of senior Fed officials remain hawkish with respect to inflation and so are talking tough to try to keep inflation expectations in check, meaning investors are taking the view there will be no further cuts in interest rates even allowing for what remains a weak US economy.
A review of Standard Chartered clients shows a unanimous view the Fed is now taking a neutral position on rates, with risk firmly to the upside as the market is factoring in at least three rate hikes of 0.25% each by the end of the year. (This is correcting at this very moment as Fed officials signaled overnight the bond market was being too aggressive).
In terms of asset allocation the bank’s clients that are benchmarked against Asian markets are currently as underweight as possible, which Standard Chatered suggests is a sensible approach given the current economic fundamentals of rising inflation and slower growth.
As well, those clients benchmarked to emerging markets have high levels of cash at present and while this has to be invested at some point the bank notes there are few obvious or attractive opportunities at present. This is particularly the case given central banks are targeting inflation yet real interest rates remain too loose, which implies significant tightening in coming months. If this comes to pass it is expected to limit any outperformance.
Such tightening moves would also impact on growth throughout the Asian region, a view shared by the bank’s clients who overall see growth forecasts for 2009 as overly optimistic given the expected monetary policy action. As the bank points out, any slowing in Asian growth makes a “V” shaped recovery unlikely, especially if there is not a similarly shaped recovery in the US to help Asian growth along.
