Barclays: Asian growth fundamentals intact despite US woes

Asian stock markets may see a further correction of between 22% to 25% in the coming months with markets like South Korea, India and Indonesia being the most vulnerable, according to Barclays Capital.

Speaking to reporters before the news of the failed US$700 billion rescue efforts by the US government to shore up its financial system, Barclays' regional economist and associate director, Leong Wai Ho said that much of the easing would stem from the unwinding of equities into cash positions by institutional investors, as well as downward revision of price-earnings (PE) valuations as analysts adjust their corporate earnings forecast.

"The structural outflow of funds will continue in the near term, but will slow down as valuations become more appealing and fundamentals re-emerge," said Leong.

Barclays is of the view that the equities markets in Asia (excluding Japan) will begin to see signs of recovery either by end of the first quarter or beginning of the second quarter next year.

Peter Redward, head of emerging Asia research at Barclays Capital said Asia's overall economic growth – underpinned by both China and India – is likely to be at 8% this year before slipping to 7.1% in 2009 due to the impact of weaker global growth on Asian exports. For most economies such as Singapore, South Korea, Taiwan and Hong Kong, the GDP growth figures for 2008 is likely to be in the 3% to 3.5% range.

"There has been a quarter-to-quarter decline for the last three quarters which will continue for at least three more quarters before we see signs of recovery. In other words, we are half way through the slowdown which is consistent with a U-shaped cycle," he added.

Redward said the region is unlikely to experience a slide on a scale similar to that of the Asian financial crisis a little more than a decade ago. "While the US (financial system) has revealed more vulnerabilities than what we had anticipated, the banking sector in this region remains largely in good shape and fundamentally sound. In fact, some like Taiwan, Thailand and Malaysia are flushed with liquidity"

He also noted out that intra-regional trade has held up better than expected pointing to a lower reliance on the US as an engine for export-led growth. Near-term weakness in Asian currencies against the US dollar would also benefit exports.

"Producers of capital goods such as those in ship and oil rig builders, heavy industries such as steel are still relatively insulated. Corporate balance sheets are also generally in good shape despite lower earnings forecast. There are slim pickings for distressed assets within the region"

"While there may be small negative wealth effects (due to funds outflows) on personal expenditures in more developed Asian economies such as Singapore and Hong Kong, consumption remains a bright spot in the region, especially in China and India where employment, wage growth and household spending are still strong," noted Redward.

Furthermore, with inflationary pressures easing due to declines in oil and food prices, there is now more wiggle room for Asian central banks to ease monetary policies while fiscal spending for infrastructure projects and agriculture could add another 0.3 to 0.4 percentage point to Asia's GDP growth in 2009, said Barclays in its latest quarterly report.

In the case of Singapore, Leong pointed out while exports has been falling, partly due to pharmaceuticals which accounts for 5.7% of GDP, the reality is that goods throughput and transhipments are still robust and still in 'double-digit' territory.

"Quantity-wise, it's still holding up very well. It's prices that have dipped. Orderbooks are still healthy and factory production capacities are still strong," he noted, adding that exports numbers could rebound as early as the fourth quarter or first quarter of 2009 once approvals for new drugs by the US Food and Drug Administration (FDA) are passed.

Leong also added that the Singapore government would still have a number of fiscal tools including off-budget measures such as cuts to companies' CPF contributions towards workers' wages and further tax rebates for older workers, lower-income households and smaller companies should the external environment deteriorates.

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