By MATTHEW PHAN
(SINGAPORE) Asia is tipped to keep growing strongly in 2007, rising currencies in the region notwithstanding. Yet, analysts warned last week that soaring equity markets in 2006 have left some parts of Asia vulnerable due to high valuations.
'GDP growth will still attract people to Asia which by running without breathing hard will continue to beat the rest of the world,' said David Fernandez, head of Emerging Asia Research for JP Morgan.
He forecasts growth for Asia ex-Japan at 7 per cent, noting that global corporations are still doing well - and it is 'hard to get bearish on growth if corporate profits are still high'.
'Economic activity should be robust in 2007, if a bit softer than 2006,' said Huang Yiping of Citigroup, who expects average growth of 7.6 per cent for the region next year, and 8.2 per cent in 2008.
Investment will play a greater role and its contribution to GDP could rise by 1-2 per cent over the next two years, helped by government infrastructure projects and declining interest rates, he added.
One of Citigroup's investment themes for the year ahead is to choose domestic over export firms, because of the strengthening currencies - led by the Chinese yuan which has risen 9 per cent against the US dollar in the last month on an annualised rate, said Merrill Lynch - and falling interest rates in the region.
Citigroup also said that momentum trading strategies have outperformed value-based strategies for the last 29 months, the single longest period of outperformance and within a hair's breadth of being the strongest outperformance, a record set in January 1998 just before a reversal to value occurred.
'The market is looking expensive but sentiment and momentum remain positive. Short-term absolute return suggests staying long but with tight stops to keep things safe,' it said.
On average, Asia is trading at 14 times forward earnings and 2.2 times book and is 'far from cheap', it said.
Credit Suisse also noted that liquidity flows into Asia have been driven by an 'unwavering belief' that Asian currencies will appreciate against the US dollar, which have led to multiple expansion as investors are willing to accept lower returns on equity in exchange for currency appreciation.
Citigroup has overweighted Hong Kong for the strong earnings yield on equities relative to bonds. It is also bullish on Singapore and Malaysia where it believes firms will return cash to shareholders.
In contrast, JP Morgan's Mr Fernandez is most bullish on Thailand, Indonesia and the Philippines where he believes falling interest rates will help 2007 growth beat the rates seen this year.
He said that local politics may create 'noise' but will not dampen domestic demand, as governments have demonstrated commitment to good macroeconomic policies. 'The numbers in Asean will meet expectations and change perceptions about the region that has had structural questions asked of it. Investors should reward Asean markets for policies that do not change rapidly.'
Merrill Lynch is bullish on Vietnam and Pakistan. The two 'frontier markets' have low correlation with the rest of the world, because their stories are largely internally driven by consumption, deregulation, infrastructure and a flurry of public listings, it said.
But analysts also expressed concern over China's revaluation of the yuan. Some said that it would dent near-term exports and incite monetary tightening, but others feel that it can stabilise medium-term growth.
'Markets want an environment of no sudden changes. The revaluation is positive because it is part of the process of deflating liquidity and reduces the medium-term risk that China goes back to interest rate hikes and capital controls,' said Mr Fernandez.
Such policies have been absent in internal debates within the Chinese government in the last few months, he said.
Most analysts are cautious on China for the time being. Credit Suisse cited 'valuation concerns'. Citigroup said that even though the telco and domestic consumer stocks still hold potential, it is bearish on the country's financial stocks, which are dominated by market capitalisation, and is thus led to underweight the country as a whole.
