my e-mail box is simply over-flowing with good news
Research Flash
Investment Strategy
Emerging equities will bubble for a while longer
Private Banking
The current euphoria in China stock markets is spreading far and wide.
Judging from the flows of funds from investors in the developed
countries into emerging market funds, it is fairly clear where most of that
money is heading. Eastwards.
The euphoria is not entirely unjustified. China's contribution to
global GDP growth this year will equal that of the US, for the first time in
recent history. At the corporate level this growth is mirrored in
record earnings growth across Asia. Equity market analysts have upgraded
their earnings forecasts for Asian blue-chip companies by the highest
margins in many years.
The problem is that equity market valuations in many Asian emerging
markets, as valued in terms of price-earnings ratios, are fast reaching
the outer limits beyond which they can no longer be easily justified.
In short, we are approaching 'bubble' territory in many Asian equity
markets. This means inflows of capital will keep pushing up valuations
for a while. Until either inflation forces interest rates higher and/or
borrowers start defaulting on their loans setting the stage for the next
recession.
But that will not happen soon. Asian central banks collectively control
upward of USD 3 trillion in reserves between them. This is a very
strong buffer to keep a systemic debt crisis at bay.
Indeed all countries sitting alongside China are benefiting the most.
Japanese firms are exporting high-tech capital equipment to China,
Korean heavy industrial goods manufacturers are seeing a boom in the growth
of their exports (exceeding that of the technology sector, for the
first time in many years) to China, Taiwanese PC makers are seeing firm
order books well into 2008. And so on.
So the three investment mantras currently being chanted by many fund
managers across the globe are those of 'China', 'commodities' and
'de-coupling'.
Commodity exporters in the emerging world as far flung as Russia,
Indonesia and Latin America are being dragged up by China's voracious demand
for their mineral and agricultural wealth.
Brazil's GDP growth, for example, will this year register over 6%; this
is double the average recorded over the last 5 years.
CSIB's economists have found evidence that Asia (excluding Japan) is
generating a new consumer impulse which is 'de-coupling' the region from
US consumer demand. Though there is scant evidence as yet that US
demand is actually collapsing.
It is not surprising therefore that emerging equity markets led by
Asia, measured by the MSCI emerging markets index, have risen over 25% from
their August 2007 lows. And the recovery started even before the Fed
rate cut happened (China 'A' equities saw no dip at all).
This is better performance than during the 30 days after the Fed cut
the Fed funds rate in 1998, the Nasdaq Composite Index rose 23.2%. And
the Nasdaq index kept inflating to form the technology bubble which ran
till March 2000.
The post-1998 tech bubble scenario is being repeated now, in the form
of an emerging markets equity bubble, we have several months more for
the bubble to expand further.
Before it bursts.
-------------------
Fixed Income:
* Tesco Plc's interim results 2007/8 above expectations
* S&P's upgraded Czech Republic's rating to A with stable outlook
* S&P's placed Kazakhstan's BBB rating on Watch negative
FX:
* USD firmer on short covering as slates are cleared ahead of the
important ADP report & ISM services tonight and Friday's NFP.
* US pending home sales plunged to a record low but homebuilders rose
on perception the worst could be over.
* Further jawboning comments from EU officials on EUR's strength but
the US employment is key for the USD. RBA left rates unchanged at 6.50%
as expected.
Equity:
* Asian equity markets will benefit from fund flows from CIC and QDIIs
* TELEKOMUNIKASI INDONESIA (HOLD): Target price breached; Downgrade to
HOLD rating
* MITSUBISHI UFJ FINANCIAL GROUP INC. (BUY): Adjusting per share data
to reflect stock split
* GOOGLE (BUY): Google has several near-term drivers, but we expect
volatility to remain high
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