>ASIA MACRO & STRATEGY OUTLOOK: We face a dichotomy of US growth optimism & China growth pessimism

Shifting Sands in Expectations


■ We face a dichotomy of US growth optimism & China growth pessimism — We don’t think expectations can diverge too much for too long – US growth optimism and China pessimism may both be too elevated – our US growth forecast only modestly upgraded, while in China’s case, data may need to get worse before policy easing picks up, and we expect that should be forthcoming soon.


■ Manufacturing recovery provides support for many smaller open economies — Many of our smaller open economies are expected to post quarterly expansion in 1Q 2012 onwards, with the help of tech-led recovery and brighter US growth prospects, with inventory de-stocking risk looking manageable. On the other hand, China’s elevated PMI Finished Goods Inventory could highlight waning IP momentum in the near term.


■ Most Asian CBs agree with us – less concerned with growth risks vs. inflation — Policymakers are weighing US growth upside risk more than China growth downside risk in the backdrop of sticky core and inflation expectations and oil risks. Many have already shifted tone from earlier dovish to more neutral (e.g. Indonesia, Philippines), neutral to slightly more hawkish (Korea, Malaysia), and even from previously slightly dovish to slightly more hawkish (Singapore, Thailand).


■ India, Vietnam and China are exceptions — India and Vietnam have hiked policy rates a lot and have more room to ease, though in India’s case, less room than before given oil/subsidy risks. China is another exception – growth/inflation/inflation expectations have come off significantly – and it is likely to use RRR cuts as a monetary easing tool, but if easing is delayed and inflation is coming off to the sub 3% range, an asymmetric rate cut cannot be precluded.


■ FX as a policy easing tool? — We doubt RMB is “close” to fair value (though likely “closer” to fair value than before), given our expectation of resumed FX reserve accumulation, albeit at a slower pace. Nonetheless, we think by keeping it in a tight range, it is being used as a policy easing tool, which on top of JPY weakness, will undermine the Asia FX outlook, especially for trade-dependent countries which compete with these countries and have weak domestic demand.


■ Risk to further back up in US yields complicate our view on assets — Heavily owned fixed income markets – Malaysia, Indonesia, and to a lesser extent Korea – could be relatively vulnerable. MGS has already outperformed swaps by a decent margin over others and could be a source of relative vulnerability. We still prefer PHP bonds to IDR local government bonds. On external debt, higher yielding sovereigns/quasi-sovereigns (e.g. Sri Lanka, Vietnam) offer better cushion than lower yielding Indonesia and Philippines.


To read full report: STRATEGY OUTLOOK
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