JFAM gazes towards 2006

The asset manager predicts a promising, but precarious short-term environment.

JF Asset Management (JFAM), part of JPMorgan Asset Management, unveiled its investment forecast for the year's final quarter and offered some preliminary projections on the global and regional economy into 2006. In addition, the firm also laid out its views on the individual Asian economies and the factors driving its weightings.

The short-term outlook was presented by Geoff Lewis, head of investment services at JFAM, and the overriding mood of the forecast was rather positive for both the international economy and in Asia. However, he was quick to point out that bumps would emerge on the road ahead, which could potentially come from problems with inflation, interest rates and the effect of global oil prices and the US housing market.

According to Lewis, the group believes that the most likely scenario for the coming 12 months will be a reversion to trend growth. JFAM expects interest rates to remain on its present course, with the Fed to raise funds to 4.25% in the coming months and core inflation to accelerate slowly. If fears of US inflation rise dramatically, the manager expects rates to hit 4.5% sooner than expected.

If managed correctly, the firm also believes that the so-called housing problem in the US will not expand much further. JFAM stresses that the Federal Reserve appears on top of the potential bubble formation and that if the problem were to escalate, it would likely be the New York and Los Angeles property markets that feel the brunt.

On the currency side, the Asia arm of JPMorgan Asset Management expects the dollar to firm until-2006 before weakening again, which the firm stresses may encourage the People's Bank of China to encourage further flexibility on an renminbi revaluation.

Aside from drawing positives from the country's currency agenda and supporting a move to a currency basket, JFAM is also relatively bullish on the Chinese economy in the short term. The firm expects real growth in China for 2005 to land between 8-9%, before easing to 7-8% in 2006. However, it was also adamant that the currency revaluation undertaken over the summer would not seriously impact capital inflows into the country, nor effect China's long-term growth cycle.

"China is at the stage where it can continue to grow quite rapidly," says Lewis. "China got itself off the a hook of a pegged rate with minimal impact on international trade and it is still in the early stages of its high growth path."

From a weighting perspective, JFAM views its Chinese portfolio as neutral, along with investments in Australia, New Zealand, Taiwan and South Korea. Further up the allocation pecking order, the firm remains overweight in Hong Kong and Singapore investments.

Looking at Hong Kong, JFAM remains particularly bullish on the short-term prospects for the territory, deeming it the best market in Asia ex-Japan, pointing to the property sector and the state's relative immunity to rising oil prices as a positive attribute.

"Hong Kong is in the position to better withstand oil prices, as oil consumption per GDP is the lowest in Asia," says Lewis. "It's more successful as a business centre than China and on the shipping front, we see less containers as a positive for Hong Kong."

Elsewhere in the region, JFAM revealed that it is underweight on Malaysia, Thailand, Indonesia and India, and very underweight on the Philippines.

Overall, the manager does believe that the end of the year will look good for Asian equities as opposed to bonds and also sees some good valuations and stable economic signs coming from Japan.

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