Risky asset classes will continue to deliver strong performance through the recovery phase of the financial crisis in 2010, Credit Suisse private banking projected at a recent briefing. This comes after 2009 turned out to be the second best performing year for Asian equities on record, and led the Swiss bank to suggest an investment strategy that is overweight equities and commodities and has only moderate exposure to underperforming cash and government bonds.
"Equities and commodities will be the best asset classes to deliver pay-offs to our clients," said Fan Cheuk Wan, managing director and head of Asia-Pacific research for Credit Suisse private banking.
Specifically, Fan expects Asia's technology sector to deliver returns driven by the global inventory rebuilding process and the recovery in demand for information technology. Credit Suisse estimates the earnings rebound in the technology sector was 81% in 2009 and will fall to around 60% in 2010. To position for the next global IT up-cycle, Credit Suisse advises investors to add strategic holdings in Asian technology plays with strong cash flows, such as Samsung Electronics in Korea and AU Optronics in Taiwan.
Credit Suisse sees low risk of a double dip recession and it is expecting the recovery in both emerging and developing markets to retain its momentum. However, emerging market growth will remain the key engine to drive global economic growth this year.
"Going into 2010, we are likely to see stronger growth, higher inflation and higher interest rates as central banks will tighten monetary policies, and stronger currencies," said Joseph Tan, director and Asian chief economist of Credit Suisse's private banking division. Dividing the Asian economies into two groups -- the smaller and more open economies like Hong Kong, Singapore and Malaysia, and the larger economies with huge domestic demand like China and India -- Tan expects the same growth story to drive both groups this year.
Asian export growth will be 10% to 15% in 2010, Tan continued, which is beneficial to the small and open economies, which are very much exposed to trade. Demand in the first half of the year will largely come from Northeast Asian countries like China, while the demand from the US is still relatively weak.
"Last year, China, Indonesia and India were respectively the three best performing economies in Asia; this year we are expecting the same story to repeat itself," said Tan, citing the fact that these economies are backed by strong domestic demand and the ability to engage in government spending for stimulus packages. He expects that China will experience growth of 9.5% in 2010, followed by 7.5% in India and 5% in Indonesia.
The key risk for Asian economies this year, according to Credit Suisse, is double-faceted inflation. The first facet is asset price inflation faced by countries like China, Hong Kong and Korea due to the extremely loose monetary policy last year after the financial crisis.
Soaring housing prices are a policy risk for China, said Tan, adding that the Chinese authorities are rumoured to be taking steps to temper the strong mood in the housing market. In October 2009, China started to normalise its loose monetary conditions by scaling back monthly new loan creation. Credit Suisse expects that China will continue this normalisation in 2010, with the new overall lending quota set at Rmb2 trillion to Rmb3 trillion ($293 billion to $439 billion), compared to around Rmb10 trillion lent in 2009.
The next facet for inflation relates to commodities, particularly oil, and will affect the countries depending on energy and resources like India and Indonesia. Whatever form inflation takes, Tan emphasised that central banks in Asia are no longer in crisis mode, therefore will need to raise interest rates or tighten their monetary policies to control inflation. Countries like Korea, India and Indonesia are expected to lead the cycle of interest rate hikes in Asia in 2010.