DBS & UOB Kay Hian: Asia Macro Talk ...

The Asian regional equity strategy team at DBS Bank issued a flash note on Monday, 19 January. It mainly concerns the macro-economic outlook:

Latest consensus GDP forecasts survey (January 2009) reveals more downgrades by the street in the past month. The rate of downgrade was the most severe for Singapore, Taiwan and Thailand, with downgrades of 1.8, 1.3 and 1.2 percentage point respectively. 2009 GDP growth for Asia markets is negative for Hong Kong, Singapore, Taiwan and the US.

We use GDP forecast trend as an indication if negative sentiments has been priced in by the market. The strategy team considers the economic growth levels in 2001/2 as the best case scenario at this juncture as that was the last synchronized global recession recorded . We look for Asia’s GDP growth to be downgraded to these levels as a minimum benchmark. GDP forecasts for Hong Kong, Singapore, Korea and Thailand were lower than the actual levels in 2001, while forecasts for China is 0.1 percentage point away, and Indonesia another 0.2 percentage point away from the minimum benchmark. This suggests that negative sentiments may have already been priced-in in these markets by the street.

However since the US/developed economies are believed to be performing worse than they did in 2001/02 and a lot of indicators are pointing to multi-year lows, a much weaker showing cannot be ruled out for Asia. As investors digest the bad economic data from the last quarter which has been slowly reflected in 2009 forecasts on the assumption that “if trend continues or worsens”, the first set of 2009 data will be important to gauge if there are any signs of a reversal in trend or an improvement in the degree of worsening conditions. We believe this is one of the pre-conditions for equities markets to stabilize in the near term. Eurozone’s flash PMI survey for January will be out this Friday. Our economist believes the sequential month negative changes in the data should improve.

We believe the other pre-conditions for the confirmation of market bottoming are: 1) stability in the global financial institutions 2) easing credit conditions and 3) peaking unemployment rate.

And this morning we have GDP news from Singapore:

Singapore GDP growth in 4Q08 came in lower than expected at -3.7% YoY (-16.9% QoQ saar). Full year average growth in 2008 came to 1.2%, against a previous estimate of 1.5%. The low 4Q08 outcome makes a big difference to the arithmetic of 2009 growth. Even without changing our sequential growth forecast for the four quarters of 2009, average growth would fall below -3.0% (compared to -0.6% previously) thanks entirely to the lower 4Q08 GDP level. Adding in a minor tweak or two to our quarterly profile and we now expect 2009 average growth of -3.3%. That would be the lowest in Singapore history.

Notwithstanding the low growth, we believe that a neutral exchange rate policy is the preferred option for now. In an environment of high volatility in the exchange rate markets, stability is probably the safer route. Statements by the MAS (central bank) this morning corroborate this view. That leaves fiscal policy as the sole means to cushion the downturn. Against this backdrop, we continue to expect an expansionary budget.

Chart courtesy of DBS Bank:


... worst ever recession in Singapore's history in terms of its depth and duration ... may it be even worse than currently estimated by DBS? We fear China may get worse than consensus estimate now ... The "Dry Bulk Shipping" report (see page 2-3) by UOB Kay Hian suggests that it may take longer and also banks may be affected more ...