>ASIA'S EXPORT (MACQUARIE RESEARCH)

Asia’s export recovery: challenging

Asia’s exports are starting rebound
■ Asia’s equity markets remain heavily influenced by global trends. Indeed, the export cycle remains a key proxy for the region’s earnings cycle. The market’s recovery since 6 March has been truly impressive indicating two things: 1) it was significantly oversold; and 2) the global recovery is on the way.

■ As we enter the summer months, Asia’s data flow is expected to point to something of a synchronised recovery (ie, both net exports and domestic demand driving output gains). This is based on the well documented industrial destocking that will be followed by restocking now that demand has stabilised.

But the trajectory of the export recovery will flatten out
■ All of Asia’s canaries (ie, Singapore, Taiwan and Korea) are experiencing a sharp recovery in industrial production and some improvement in exports. But this is to be expected given the intensity of the output collapse.

■ If output drops from 100 to 80 and then recovers to 90, then the recovery will look V-shaped. For example, Korea’s economy contracted by 5.1% QoQ, sa, (~20% QoQ, saar) in 4Q08. A 1–2% QoQ, sa, bounce translates into a 4–8% QoQ, saar, recovery, although output is still 3–4% below peak levels.

■ With global demand stabilising, our focus shifts to the strength of final global demand for Asia’s exports and we are concerned it will disappoint. The G3 consumer, a US$25tr market vs US$4tr for Asia ex Japan, will struggle until employment bottoms. Rising energy prices are also sapping its strength.

■ Given the low levels of capacity utilisation, a capital expenditure cycle driven by the private sector does not appear likely through 2010. Indeed, there is excess capacity in the global manufacturing sector containing top-line revenues.

■ The risk is that the export rebound linked to restocking will be weak and/or further delayed than we currently anticipate. Indeed, global manufacturers are more likely to run extremely low levels of inventories if end demand is in question, reflected in a lack of pricing power.

But all of this is not necessarily bad for Asian equities
■ Although the economic rebound is expected to be subdued, this need not be negative for Asian asset markets. Indeed, one of the implications is that G3 policy will remain easy for much longer than the market expects. Fiscal policy too, may need to be reinforced and extended into 2010.

■ By extension, Asian policy is likely to remain easy as well in an increasingly liquid environment driven by the region’s rapid external adjustment. Asia has already provided significant policy stimulus; if domestic demand picks up strongly this will draw more capital into the region. Indeed, policy makers will be in a position of having to raise interest rates which will lift their currencies against the backdrop of flagging global demand.

■ We continue to believe the large domestic economies of Asia look like the best all-weather harbours: China, India and Indonesia. High-beta Asia will lose its lustre if our expectation of lacklustre recovery for the G3 plays out.

To see full report: ASIA'S EXPORT