Invesco's Greenwood sees Asian slowdown

John Greenwood of Invesco sees slowing growth in Asia in 2001.

A slowing US economy will hurt Asian exporters this year and the region's economies are unlikely to benefit from an offsetting pick-up in domestic demand, according to John Greenwood, chief economist at fund management company Invesco.

The US federal reserve will likely cut interest rates by 25 basis points at the end of January and will cut by another 25bp later this year, Greenwood told reporters at a press conference in Hong Kong. That's less than the cuts of 100bp or more predicted by some analysts and anticipated by the US bond market.

Hong Kong's interest rates move with those of the US. The relatively modest round of cuts predicted by Greenwood makes it unlikely that Hong Kong or other Asian countries will benefit from increases in domestic consumption that lower rates typically generate.

"The key question for Asia is whether domestic demand can recover enough to offset the decline in exports," Greenwood said. "Our opinion is that it can't."

That's because the amount of credit banks are prepared to extend is expanding at less than 5% a year and the broad money supply is also growing at 5%. As a result, domestic spending will likely be restricted to this level in 2001, Greenwood said.

Some countries, though, will be hit harder than others, as will some sectors. Industries that rely heavily on capital expenditure, such as manufacturing, technology and machine tools, are likely to be hurt the most. These sectors will see an increase in bankruptcies, layoffs and defaults, Greenwood said. That's because companies, especially in the US, are borrowing funds coming from abroad, and from the Federal government's surplus, to invest. And they are investing faster than they are saving, which could cause their cash flow to dry up.

The Hong Kong market will, to some extent, be protected by the "stabilizing" backdrop of China, he said. While China risks importing shocks from elsewhere in the world because of its inflexible exchange rate, the fact that its economy has yet to be integrated with the rest of the world means it will be shielded from the normal effects of exchange control.

"The same thing happened in the past with India and Taiwan when they had exchange controls," he said.

The slowdown in the US will continue to hurt Japan's export sector, and domestic consumption will remain sluggish, Greenwood predicted. That in turn will crimp imports from the rest of Asia.

Invesco's investment strategy is to reduce its exposure to defensive stocks and increase its positions in growth stocks, said Anna Tong, Invesco's head of investments.

"In the second half of last year people dumped growth stocks and found a safe haven in defensive stocks such as pharmaceuticals, which are far less cyclical," Tong said. "But these defensive stocks are no longer cheap, and if the economy can escape recession then the growth stocks are more attractive."

The investment house also favours interest-sensitive stocks such as banks and property developers. But Tong says if interest rates only go down by 0.5%, as Invesco predicts, the company may sell those shares as the market has already built that expectation into their value.

Even though some sectors will be hit hard by a slowdown in the US, Greenwood predicts that the economy as a whole won't go into recession as consumer spending will grow enough to prevent it, fuelled by increased income from refinanced mortgages, a recovery in the stock market and an increase in monetary growth. He said he expects real gross domestic product in the US to grow 2.8%, compared to growth in Hong Kong of 4.5%.

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