An Asian economic forecast with smiley faces

SociTtT GTnTrale's Asia Pacific Chief Economist says investors should focus on Japan and Hong Kong.
It is rare for a chief economist of a bank to use little green smiley faces on his power point presentations and exuberant statements such as ôWe love Japan!ö in a beginning of the year outlook.

Apparently the conservative style gurus did not give the keep-it-staid memo to Glenn Maguire, the Asia Pacific chief economist for SociTtT GTnTrale Corporate & Investment Banking Hong Kong. The Australian economist presented his year of the dog outlook late last week at the Island Shangri-la to a crowd of bankers and customers who were dressed-in-black suits and sat quietly as they followed his presentation without question.

Maguire did not offer any shockers. He is bullish on Japan and reckons Hong Kong is entering its own sweet spot too. It was his to-the-point presentation that was amusingly refreshing.

Consider this opening salvo to his Japan power-point presentation:

ôWe love Japan!

ôAfter 10-15 years of everything going wrong, Japan appears to be entering 2006 in something of a ôsweet spotö...that is, everything is finally going right.ö

But the former economic adviser to the prime minister and cabinet in Canberra does back it up with some more traditional charts and statistics. While he notes that over the fourth quarter of 2005 Japan was one of the fastest growing economies in the world, he figures that over the next two years growth will normalise. The bank forecasts 2006 GDP growth for Japan at 3.2%, slightly down from its call of 3.6% growth in 2005.

Yet he does not think it is too late to participate in JapanÆs economic recovery.
Good signs include the fact that Japanese exports have become more competitive, benefitting from other Asian currencies appreciation in anticipation of remnimbi revaluation û in particular, the Korean won and Taiwanese dollar, which have both appreciated (by 30% and 15% respectively) against the yen since the start of 2004.

More important, Japan is not just relying on exports. The economic recovery that began at the end of 2002 and was then driven essentially by exports to China and the US, is now also supported by a recovery in domestic consumption, particularly in household spending.

He argues that the recovery in household spending and strong levels of corporate investment are allowing a more efficient use of production capacities and reducing the imbalance between supply and demand. He also notes that over time, the equity market has increasingly had a greater impact on Japanese consumer sentiment, which is supporting the economic recovery.

Considering SociTtT GTnTrale offers several derivatives structures that are tied to stock market indexes and regional trends, bankers from SociTtT GTnTrale reason there are alternative ways to make money from JapanÆs recovery. Indeed, the next speaker at the conference, Paul Stevenson, who is director, financial engineering for the bank, pointed out that investors are increasingly turning to index-tracking products that have profit lock-in mechanisms, so as to offer protection. He said the bank was considering offering a structure tied to the Nikkei similar to its Alpha Equity Fund, which tracks the Hang Seng Index in Hong Kong.

As for Hong Kong, Maguire remains bullish, arguing that property prices are likely to gain further support from the anticipated end of the United States federal reserve tightening cycle. (Maguire reminded the audience that the new Fed Reserve Chief Ben Bernanke's comments during his first official congressional appearance on February 15 were far less hawkish than many worried they could have been.)

And Disney will like this one, because Maguire's also singing its tune: He figures that significant new tourism attractions are boosting the services sector, which is good for the economy. He cites Disney, and also Harvey Nichols û only in Hong Kong would a high-end department store be labelled as a tourist attraction, but it is a spot-on read of the cityÆs mentality.

While he concedes avian flu could be a concern (as well as IranÆs nuclear ambitions, problems in the Middle East and oil prices) he discounts the likelihood of it becoming a global-economy wrecker, and points out that as things stand now, people are more likely to get killed crossing an Asian big-city street than by contracting avian flu.
¬ Haymarket Media Limited. All rights reserved.