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Economics – Markets – Strategy
Asian Equity Strategy
Fig. 7: Table of policy rate forecasts
current 3Q08 4Q08 1Q09 2Q09
US 2.00 2.00 2.50 3.25 4.00
Japan 0.50 0.50 0.50 0.75 0.75
Eurozone 4.00 4.25 4.25 4.25 4.25
Indonesia 8.50 9.25 9.25 9.25 9.25
Malaysia 3.50 4.00 4.00 4.00 4.00
Philippines 5.25 5.75 6.00 6.00 6.00
Singapore* 1.44 1.31 1.52 1.94 2.31
Thailand 3.25 3.25 3.75 3.75 3.75
China 7.47 7.47 7.74 8.01 8.28
Hong Kong* 2.15 1.95 2.35 3.05 3.70
Taiwan 3.50 3.75 3.88 3.88 3.88
Korea 5.00 5.00 4.75 4.50 4.50
India 8.00 8.25 8.25 8.25 8.25
Source: DBS. Up / down arrows denote revisions made
since last quarter. First published for 2Q09 figures. * 3-
month interbank rate used. Current as of June 11.
Fig. 8: Table of exchange rate forecasts
current 3Q08 4Q08 1Q09 2Q09
Japan 107 106 107 108 109
Eurozone 1.55 1.52 1.49 1.46 1.43
Indonesia 9,319 9,500 9,600 9,700 9,800
Malaysia 3.27 3.30 3.35 3.40 3.45
Philippines 44.4 45.0 47.0 45.0 45.0
Singapore 1.37 1.38 1.40 1.42 1.44
Thailand 33.1 33.5 34.0 34.5 34.9
China 6.92 6.80 6.75 6.70 6.65
Hong Kong 7.81 7.81 7.83 7.84 7.85
Taiwan 30.4 30.5 31.0 31.5 32.0
Korea 1,025 1,075 1,100 1,075 1,075
India 43.1 43.0 43.5 42.5 42.5
Source: DBS. Up / down arrows denote revisions made
since last quarter. First published for 2Q09 figures.
Current as of June 10.
Grappling with Oil
Having said that, rising inflation particularly from
higher energy prices, will have a varying impact
on the economies in Asia. Countries that are still
subsidizing fuel prices including Indonesia, Malaysia
and India have cut subsidies by 28.7%, 40% and
10%, respectively (average, depending on fuel
category). This does not bode well for the inflation
trend to soften soon in these countries. Interest
rates are likely to rise, whilst fear of social instability
and the potential for further subsidy cuts will
dampen sentiment. This comes at a time when
the political scenes in these countries are becoming
less stable. Indonesia and India will hold their
general elections next year, while Malaysia's ruling
party just lost its 2/3 majority win in the last elections
and political upheaval is budding.
Most importantly, these three countries run large
budget deficits that if left unchecked coupled with
ballooning subsidies because of higher oil prices,
could lead to rating downgrades.
We now have underweight recommendations for
these three countries.
Dollar rebound
Secondly, with the pause in the US monetary easing
cycle, the USD might not weaken as much as in
the first half this year. And some Asian currencies
may find difficulty strengthening. Hence, there are
threats of higher Asian interest rates if currencies
cannot help tame inflation. We have pencilled in
more rate hikes or brought forward the rate hikes
for some.
The only country for which we still have a rate cut
forecast is Korea. Our modelling suggests that a
weaker currency and lower interest rates are positive
drivers for Korea's 12-month forward return. Hence,
in line with a positive outlook to the growth scenario,
we are raising Korea to Neutral from Underweight.
(See section on Korea)
Rising bond yields
Thirdly, bond yields are expected to rise from here
as the bond market starts to price in rate hikes.
We expect the US 10-year bond yield to rise to 5%
from 3.8% currently. The implications for equities
are that equities will be deemed expensive in a
rising interest rate environment, but our stress test
suggests that the bond / earnings yield relationship
is still within the one standard deviation band.
Fig. 9: US / Asia ex-Japan earnings yield ratio - proforma
at US 10-year bond yield = 5%
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
(x)
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: DBS, Datastream, Bloomberg
Equities
expensive
Equities
cheap
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