Categorized | Market Update

Market Updates 05/03/2013

February highlights
 Italy’s election results triggered concerns that it may raise tail risks for the Euro area again
and increase the risk that investors will resort to ―safe havens‖ as before.
 Chairman Ben Bernanke defended the Federal Reserve’s low-interest rate policies to calm
fears that super-low rates risk igniting inflation or rattling investors.
 In Japan, the new government surprised by nominating Kikuo Iwata, a supporter of radical
reflation policies, as one of the two new deputy governors of the Bank of Japan.
 After overall data in January confirmed the view that economic activity is rebounding, the
final reading for the global manufacturing PMI slid to 50.8 in February for the first time
since the index started rebounding last September.

Economic Outlook in Asia
Countries with a lower risk of overheating credit to stay loose on
monetary policies
Not only could EM Asia face global liquidity injection (or potential
liquidity injection) from advanced economies, but also inherent risks
associated with EM Asia‘s various policy responses to this currency
war, namely, escalating currency intervention and prolonged low real
rates in fuelling further expansion of risk-taking and leverage.
There seems no sign of an unsustainable ―bad‖ credit boom in
Philippines nor in the CA deficit countries of India and Indonesia in
terms of credit-to-GDP increase and/or the level of financial depth in the
economy. While Korea‘s household debt is high, Citi analysts would
argue that the recent trajectory does not look particularly alarming.
Indeed, Korea‘s bank credit-to-GDP has already declined since mid-
2009. Thus, Citi analysts still expect BoK to cut rates one more time and
tolerance to let KRW appreciation for the time being.
Excluding HK and SG where policy tools are limited given their FX
regime, Thailand, China, and eventually Malaysia and Taiwan are likely
to start tolerating stronger FX appreciation and more proactive liquidity
management tools including reserve requirements, more proactive
sterilization) before any gradual move towards policy rate normalization.

Asia Equities
Weak Yen = Weak Korea?
Many investors generally believe that weaker yen is great for Japanese
exporters but bad for Korea. With this, they buy Japanese stocks and
sell Korean equities. Within Korea, many sell exporters and switch into
domestic economy stocks.
Citi analysts, however, argue against this simple corollary. From a
fundamental perspective, it is worth noting that Korea Inc has enjoyed
higher EBIT margins, better asset turn and thus higher ROE and ROA
versus Japan. In local currency terms, there is little relationship between
yen/won cross rates and the market or relative corporate profitability.
Run the same series in US$ terms, and a weaker yen has actually
proven positive for Korea. Despite having better brand recognition,
Japan has lower EBIT margins, asset turns, ROEs and ROAs than
Korea. Besides exports to GDP for Japan are a mere 13% versus
foreign earnings, which make up 33% of the stock market. In Korea
both ratios are closer to 50%. Both markets now trade on a P/BV of 1.2x
– Korea does so with an 11% ROE versus Japan at 4.4%.
The bottom line in Japan is that it will take more than the yen rate at 92
to lead to a 2.5 times increase in ROE. Investors should focus on
companies which have more than just a weak yen story attached to
them. Those companies which have independent strategies to raise
margins and/or asset turn will do especially well. Over in Korea, selling
Korean stocks due to yen weakness is too simplistic. Manufacturers
have internationalized significantly over the last decade. As such, the
trade-weighted currency matters more today than it has in the past.

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Symbol Bid Ask Spread
EURUSD 1.17570 1.17590 2
GBPUSD 1.31880 1.31910 3
USDCAD 1.26550 1.26580 3
USDJPY 113.640 113.660 2
USDCHF 0.98530 0.98560 3
AUDUSD 0.77810 0.77840 3
NZDUSD 0.69200 0.69250 5
EURGBP 0.89130 0.89160 3
EURCHF 1.15860 1.15890 3
EURJPY 133.610 133.640 3
AUDJPY 88.420 88.470 5
GBPJPY 149.860 149.920 6
XAUUSD 1279.89 1280.29 40
XAGUSD 17.063 17.113 5