Higher Oil Doesn't Shock
Barron's Online - International Trader - Asia
ASIAN MARKETS SEESAWED as hurricane Katrina crippled energy production in the Gulf of Mexico, sending oil prices above $70 per barrel and raising concern among global investors that growth in the world's strongest region will subside. If crude remains around $70, UBS Securities sees Korea's economic growth slowing to 2.5%, compared with 4% with under-$50 oil. China's annual growth could fall to 7.6% from 8.2%; Taiwan's, to 2.5% from 3.5%; Thailand's, to 4% from 5%, and Indonesia's, to 4.9% from 5.5%.
In Indonesia, where fuel-price subsidies account for a quarter of the nation's budget, the market already is under pressure. Benchmark Indonesian stocks have lost a third of their value in dollars since Aug. 3, amid fear that prices will soar and that political risks will increase, threatening reforms introduced by President Susilo Bambang Yudhoyono. As Indonesia's central bank moved last week to boost interest rates and support the rupiah, Bear Stearns strategist Michael Kurtz wrote that the market would stabilize, particularly since the deficit is reasonably contained and the country enjoys a sizable trade surplus.
David Kotok of Cumberland Advisors still deems Asia his "preferred place in the world," and said that China, India, Singapore and their neighbors would manage their currencies to avoid shocks. "The only issue is if [the U.S.] slows quickly and imports are lower than expectations," Kotok said. "That is in the cards for the short term because energy is biting into disposable personal income. It is only for the short term, but it will scare the hell out of the markets."
So far, the wealth effect from rising property prices has offset the higher cost of oil. Since mid-May, crude has shot up by about $20 a barrel, but Asian markets have risen more than 10%. The trend is unlikely to persist, however, as analysts' assumptions for oil are well below spot prices, and a round of downgrades could ensue.
Morgan Stanley believes markets in Malaysia, Australia and Hong Kong are "best-placed to resist" the negative effect of higher oil prices, while those most vulnerable include Thailand, Indonesia, and Korea. "The end will come with either a big correction in the U.S. real-estate market or with hot money leaving Asia," wrote Andy Xie, Morgan Stanley's Asia economist, last week.
For all that growth might slow, Asian companies are in reasonable shape, accumulating cash and paying down debt. Net debt to equity among the companies covered by ABN Amro is down to 25% this year from 60.5% in 1998, and is expected to fall below 20% in 2006. Thailand, Korea and Indonesia have seen the most dramatic reduction in debt. And ABN Amro sees free cash flow rising 60% in 2006.
Korea has been one of the better markets, owing in part to equity purchases by Korean retail investors taking advantage of new savings plans. Global investors still consider Korea cheap, but are waiting for lower interest rates and monitoring what authorities have deemed a bubble in the real-estate market. "They're keeping a keen eye on retail money flow, and checking if oil prices come down," says John Bai, managing director at CLSA Asia Pacific Markets in New York, who sells Korean equities to hedge funds and institutions.
Global emerging markets "continue to look very attractive," says Hayes Miller, head of global asset allocation for Baring Asset Management. "They're materials-rich, energy-rich, and valuations are still more attractive than in developed markets. There's nothing to change our view that we're in a long-term supercycle that favors emerging markets disproportionately." But Miller still is down on Japan, despite others' enthusiasm.
Spencer White, of Merrill Lynch in Hong Kong, downgraded Thailand in February. But he, too, said last week that conditions are in place "to make it a compelling upgrade to overweight." White cites improving growth, an expected pickup in exports and tourism, some of Asia's highest yields and lowest valuations and a move by Thai corporations to start borrowing again, suggesting that returns on equity could soar.
E-mail: leslie.norton@barrons.com
ASIAN MARKETS SEESAWED as hurricane Katrina crippled energy production in the Gulf of Mexico, sending oil prices above $70 per barrel and raising concern among global investors that growth in the world's strongest region will subside. If crude remains around $70, UBS Securities sees Korea's economic growth slowing to 2.5%, compared with 4% with under-$50 oil. China's annual growth could fall to 7.6% from 8.2%; Taiwan's, to 2.5% from 3.5%; Thailand's, to 4% from 5%, and Indonesia's, to 4.9% from 5.5%.
In Indonesia, where fuel-price subsidies account for a quarter of the nation's budget, the market already is under pressure. Benchmark Indonesian stocks have lost a third of their value in dollars since Aug. 3, amid fear that prices will soar and that political risks will increase, threatening reforms introduced by President Susilo Bambang Yudhoyono. As Indonesia's central bank moved last week to boost interest rates and support the rupiah, Bear Stearns strategist Michael Kurtz wrote that the market would stabilize, particularly since the deficit is reasonably contained and the country enjoys a sizable trade surplus.
David Kotok of Cumberland Advisors still deems Asia his "preferred place in the world," and said that China, India, Singapore and their neighbors would manage their currencies to avoid shocks. "The only issue is if [the U.S.] slows quickly and imports are lower than expectations," Kotok said. "That is in the cards for the short term because energy is biting into disposable personal income. It is only for the short term, but it will scare the hell out of the markets."
So far, the wealth effect from rising property prices has offset the higher cost of oil. Since mid-May, crude has shot up by about $20 a barrel, but Asian markets have risen more than 10%. The trend is unlikely to persist, however, as analysts' assumptions for oil are well below spot prices, and a round of downgrades could ensue.
Morgan Stanley believes markets in Malaysia, Australia and Hong Kong are "best-placed to resist" the negative effect of higher oil prices, while those most vulnerable include Thailand, Indonesia, and Korea. "The end will come with either a big correction in the U.S. real-estate market or with hot money leaving Asia," wrote Andy Xie, Morgan Stanley's Asia economist, last week.
For all that growth might slow, Asian companies are in reasonable shape, accumulating cash and paying down debt. Net debt to equity among the companies covered by ABN Amro is down to 25% this year from 60.5% in 1998, and is expected to fall below 20% in 2006. Thailand, Korea and Indonesia have seen the most dramatic reduction in debt. And ABN Amro sees free cash flow rising 60% in 2006.
Korea has been one of the better markets, owing in part to equity purchases by Korean retail investors taking advantage of new savings plans. Global investors still consider Korea cheap, but are waiting for lower interest rates and monitoring what authorities have deemed a bubble in the real-estate market. "They're keeping a keen eye on retail money flow, and checking if oil prices come down," says John Bai, managing director at CLSA Asia Pacific Markets in New York, who sells Korean equities to hedge funds and institutions.
Global emerging markets "continue to look very attractive," says Hayes Miller, head of global asset allocation for Baring Asset Management. "They're materials-rich, energy-rich, and valuations are still more attractive than in developed markets. There's nothing to change our view that we're in a long-term supercycle that favors emerging markets disproportionately." But Miller still is down on Japan, despite others' enthusiasm.
Spencer White, of Merrill Lynch in Hong Kong, downgraded Thailand in February. But he, too, said last week that conditions are in place "to make it a compelling upgrade to overweight." White cites improving growth, an expected pickup in exports and tourism, some of Asia's highest yields and lowest valuations and a move by Thai corporations to start borrowing again, suggesting that returns on equity could soar.
E-mail: leslie.norton@barrons.com
posted by Marcel at 6:52 AM
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