Nomura forecasts a year of rebalancing for Asia

Japanese bank Nomura expects 2010 to be "a tale of two recoveries" with developed economies in Europe and the US experiencing a staggered recovery after the financial crisis, while emerging markets like China and India will enjoy a strong come-back. 
 
Despite the expectation of rate hikes across Asia, the bank's chief economist for Asia, Robert Subbaraman expects monetary policy in Asia to remain relatively loose this year when measured in inflation-adjusted terms. This, combined with strong economic fundamentals in some countries in the region, will drive domestic recovery and support investment, Subbaraman said at a recent press briefing in Hong Kong. Second, private consumption growth is accelerating in Asia as a result of better employment conditions and improved consumer sentiment and growth in domestic consumption is expected to overtake exports to become the major growth driver for 2010.  
 
"China is in one of the best years in decades," said Mingchun Sun, Nomura's chief economist for China. China's investment boom is expected to continue, with fixed asset investment expected to grow at 30% in 2010. The investment boom will lead to strong demand for raw materials and capital goods, which will drive up producer price index (PPI) inflation to 6%.
 
However, Sun argues that the high PPI inflation will not translate into a rise in the consumer price index (CPI) due to over-capacity in the manufacturing sector and rapid growth in labour productivity. He forecasts CPI inflation in 2010 will be as low as 2.5%, and because of this insignificant CPI inflation threat, there is only a mild chance of aggressive policy tightening from the Chinese authorities.
 
In response to a question, Sun said there is certainly an imperative for Chinese households to diversify their investments beyond the country's borders. "The government has printed so much money in the [past] two years and the majority of this money will eventually go into household pockets -- it has to be invested somewhere, not just in the Chinese markets," he said.

In India, Nomura expects the central bank, the Reserve Bank of India, to start normalising its policy rates in January, and hike its repo and reverse repo rates by 125bp each in 2010. The Indian rupee will appreciate due to rising net capital inflows. Nomura forecasts India's growth rate in 2010 at 8% with a matching inflation rate. Key downside risks include higher oil prices and a global double-dip recession. 
 
Sean Darby, Nomura's Asia equity strategist, expects corporates to continue to report good profits in the first six months due to their strong pricing power and the fact that they are operating at high capacity utilisation rates. Profit cycles are looking good for the second half of the year as well. Darby expects some decoupling in the world's economies in 2010. "Everyone owns the same types of assets now -- gold, oil and property. But [in Asia] stock picking will come back in fashion in the next nine months," he said. 

Nomura predicts that infrastructure will remain a key area of investment in the region over the next few years as governments seek to boost their economies and create jobs.
 
Darby also points out that negative real interest rates in the region have become catalysts for stockmarkets to perform strongly, especially in places like Hong Kong, Taiwan and North Asia. He points out that in 2007, which also witnessed a period of negative real interest rates, warrants gained in popularity and up to one-third of local equity market turnover was in warrants. "This scenario might happen again in the next 12 months," said Darby.