ING Barings says domestic demand needed to boost Asia

Quality of local markets will be important for stimulating Asia''s economies in 2002.
China, Hong Kong, Indonesia, the Philippines and South Korea are the Asian economies most likely to see better growth when the US economy bottoms out at the end of the first quarter in 2002.

That is the verdict of Tim Condon, chief economist for Asia with ING Barings, who was addressing journalists at a press briefing in Hong Kong yesterday.

Condon, in common with many of his peers, sees US recovery as vital to the economic fortunes of Asian countries, and despite the current air of uncertainty following the events of September 11, Condon is confident that the US will see better growth from early next year.

"The policy response, both monetary and fiscal, has been good in the US," says Condon. "Interest rates have been cut by 400bp already and we can expect another 25bp cut by the end of the year. It's also expected that the $130 billion fiscal package could boost GDP by 1%.

"There is no reason why the monetary and fiscal measures will not work," he adds. "There are no structural impediments in the US to prevent a recovery in the first quarter and when the US economy stabilizes, sentiment will improve markedly in Asia."

The countries that Condon picked as being in the best position to benefit are those where there are the least impediments to movements of capital, labour and land and where domestic demand is unimpaired and could sustain growth.

Unfortunately, not all Asian countries are in this (relatively) fortunate situation and have been diagnosed as suffering from Asiaclerosis, a mysterious new illness discovered by ING Barings.

The bank defines Asiaclerosis as a situation where GDP growth has been hampered by the difficulty of asset restructuring in the aftermath of banking crises. Economic restructuring proceeds slowly because difficulty in restructuring assets depresses the return on capital and undermines domestic demand.

Malaysia, Taiwan and Thailand are thought by ING to have contracted the illness and will only start feeling better when exports recover.

In terms of GDP forecasts, China ù in accordance with the common consensus ù looks the best prospect and ING predicts the country will see real GDP growth of 7.5% in 2002. The bank also predicts that every other non-Japan Asia country will see GDP increase next year, although, given the current malaise, that is the least that could be hoped for.

On a much brighter note, the bank's chief equity strategist, Markus Rosgen, believes that the region's stock markets will see a marked improvement as investors look to get more value for their money than they currently get from bank deposits.

"Asia is certainly an area where investors should be looking at stocks to buy," Rosgen asserts. "It is the least leveraged region in the world today and 45% of companies have dividend yields that are higher than the savings rate and that figure is 70.3% in Hong Kong and China. For example, a person who puts their savings in Hang Seng Bank gets a 1% return when it would be 6.6% if they bought the stock itself."

According to Rosgen, if retail investors were to take just 10% of their savings and invest in equities, this would add $160 billion to the stock markets. As the US recovers, Rosgen believes it is time to get more bullish about Asian stocks.

"There is a lot of value in Asia and confidence will come back once there is an improvement in the US economy," he argues. "Asia will be the main beneficiary of that, the region to pick. We will probably see another quarter where investors hold on to defensive stock such as banks or utilities, but in a couple of months people will start to focus on underweight stocks in the telecoms and tech sectors."

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