Asia Region Market Update 05/02/2013

Asia ex Japan : China’s cyclical rebound on track

Analysts believe that a modest cyclical rebound appears on track despite holiday-related distortion.

The official PMI declined slightly from 50.6 in Dec 2012 to 50.4 in Jan 2013 but has stayed above 50 for four months. These results suggest the cyclical rebound is on track, although the pace of expansion appears modest.

Both exports and imports may be growing at 5-10% YoY for Jan- Feb combined. Given that trade activity tends to be slow during the CNY, export and import growth may have jumped to 17.3% and 22.8% in January due to a low base as CNY fell into January in 2012. Meanwhile, input prices jumped significantly implying higher inflation later this year. The Jan data on inflation, trade and money growth are likely to be distorted by the holiday effects, and need be interpreted with caution.

Inflation is expected to be volatile in 1Q, but trend up from 2Q. With downside growth risks significantly reduced and inflation expectation rising, policies may gradually shift from an easing bias to a neutral position. However, PBOC may need to cut RRR or scale up reverse repos in Feb to deal with holiday-related liquidity shortage.

Equities

5 key factors dictating the next moves after 20% rally

From previous rallies that have generated 20% or higher returns, Citi analysts have identified 5 critical factors dictating the next moves over the next 12 months. These are (1) lower than average starting valuations, (2) double digit EPS growth, (3) rising PMIs, (4) rising core government bond yields and (5) sustained flows into equity funds.

Notably, Asia ex-Japan has had regular equity bursts approximately once every five quarters since 1988. While all of these factors are not necessarily required for markets to rally strongly from now, history shows that equities tend to make stronger gains when more of the five factors are observed. Conversely equity markets failed to rise beyond the initial 20% mark when these factors were not present.

Also, different factors have been more or less important for different equity markets. Especially in Asia, US treasury yields have been the most important factor followed by PMI, Capital Inflow, Starting PE while EPS has been the least important one.

As such, analysts expect Asia ex Japan to have relatively stronger fund flows, EPS and economic activity than other regions which may lead to stronger returns over the next 12 months.

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Symbol Bid Ask Spread
EURUSD 1.17890 1.17910 2
GBPUSD 1.33470 1.33500 3
USDCAD 1.28520 1.28550 3
USDJPY 113.470 113.490 2
USDCHF 0.99060 0.99090 3
AUDUSD 0.75320 0.75350 3
NZDUSD 0.69130 0.69180 5
EURGBP 0.88310 0.88340 3
EURCHF 1.16800 1.16830 3
EURJPY 133.780 133.810 3
AUDJPY 85.460 85.510 5
GBPJPY 151.450 151.510 6
XAUUSD 1243.94 1244.34 40
XAGUSD 15.723 15.773 5