The global economic outlook remains uncertain and dependant upon how issues in Europe are resolved and with continued positive momentum from the US and China, said Citi Asia Pacific strategist.
Both US and China are also facing major political developments in the coming year, with elections in the US and leadership change in China. These changes will dictate how markets perceive risk and policy uncertainty. Investors should remain conservative yet nimble in their asset allocation, said Haren Shah, senior investment strategist, Wealth Management, Citi Asia Pacific.
“Looking back, 2011 was a very unpredictable year. Even though we knew there were a number of concerns out there, political upheavals and natural disasters raised the levels of uncertainty. We started the year with the knowledge that risk post the global financial crisis, had increased, and that the global recovery was going to be patchy at best. What we may have underestimated was investor nervousness on the lack of clarity and resolution of the many issues facing the global economy. As such, looking forward to 2012 requires one to take a step back, reflect, and move back to basics,” he said at a briefing in Bangkok on Tuesday.
One of the most daunting problems looking forward to 2012, remain the discrepancy between reality and perception in the financial markets. Investors are very much focused on the news flow which has been rather negative and worrying.
“But at the same time when we look at corporate earnings results and economic data, the outlook is stable. This disconnect is reflected in the global growth outlook which according to the IMF, remains positive for 2011 and 2012; however the valuations in financial markets are reflecting a global recession,” he said.
Europe will remain the main headwind in 2012. The debt crisis will require political courage and economic pain. Europe will most likely see slower growth if not a recession in 2012 if all the austerity budgets are enforced. It could see some optimism if European leaders are able to get coordinated and implement more concrete measures which protect the financial system against contagion beyond Greece. This especially has taken a sense of urgency as contagion spreads to Italy and Spain. The other two issues that will be in focus are the potential slowdowns in economic growth in both the US and China. Recent data have put some of this fear aside as the US is showing growth albeit modest, while the prospect of a hard landing in China is receding.
The Asia-Pacific excluding Japan that the GDP growth in the region is expected to slow from 7.3 per cent in 2011 to 6.9 per cent in 2012, as exports bottom. There is likely to be trend divergence within the region. The more trade dependent economies, such as Singapore, Hong Kong and Taiwan, may see growth slow noticeably in 2012. On the other hand, parts of ASEAN are likely to be more resilient – Thailand owing to reconstruction, Malaysia and Philippines on fiscal support, and Indonesia on policy-driven declining real interest rates. Asia’s monetary policy flexibility is constrained by sticky core inflation, fear of a third round of quantitative easing in the US (QE3) and, in most cases, very low real and nominal rates. He believes Asia’s strong fiscal balance sheet and a heavy election calendar in 2012 argue for a bias towards more proactive fiscal policy to cushion growth.
Citi sees potential for more upside than downside in Asian equities. Consensus corporate earnings growth forecasts for Asia ex Japan currently stand at 7 per cent for 2011 and 11 per cent for 2012.
“Historically, a recession would mean an over 20 per cent earnings drop in Asia, so we still seem to be far from that,” Shah said.
For Thailand, fiscal spending and private investment looks set to remain strong, driven by post-flood restoration and prevention activities. Such activities will contribute to Thailand’s GDP growth rising to a forecasted 3 per cent in 2012, up from 1.7 per cent in 2011. The Thai Monetary Policy Committee (MPC) may start raising rates in the fourth quarter as production capacity normalises and growth prospects firm up.