Dark before the dawn

Asian equities may defy region's gloomy outlook

A cut to Asian growth forecasts could herald a counter-intuitive boost to the region’s stocks. Even as vital signs dim, central banks are pumping out cheap cash and there are glimmers of a US recovery. Investors may turn from the haven of Asia’s bonds to the promise of its equities.

The International Monetary Fund and World Bank have both pared back their estimates of growth for the region. The pain of a slowing China, a recession in Europe and an anaemic US recovery is most evident in the region’s export-sensitive economies.

The International Monetary Fund (IMF) projects that South Korea’s GDP growth will slow to 2.7 per cent this year, with Singapore growing 2.1 per cent and Taiwan just 1.3 per cent.

That should give foreign investors pause. They have bought $39 billion in Asian stocks so far this year, according to Nomura. But they’ve also sought shelter in Asia’s bonds, supporting a $587 billion boom in bond sales for Asia excluding Japan in the first nine months of 2012. South Korea’s bond yields are at their lowest in more than a decade.

Asia’s bonds may no longer seem such a safe haven now that some of the uncertainty elsewhere has dissipated. In Europe, promises from the European Central Bank to buy bonds have pushed the cost of insuring Spanish debt to its lowest in a year. Asset purchases by both the US Federal Reserve, the Bank of Japan and the People’s Bank of China are keeping the global financial system awash in even more cheap funds.

The balance of that cash is likely to favour equities over bonds. While the IMF cut its growth forecasts for 2013, it should still be a better year than 2012, as the world’s largest economy revives. Housing and manufacturing data from the United States are ticking up.

Asia probably has farther to fall before the US tide reaches it. But with inflation perking up and foreign exchanges reserves rising once again, Asia’s central banks may no longer feel the pressure to cut rates any further. That may strengthen the argument for trading Asian bonds for the region’s stocks.