CIMB bullish on Asian equities

CIMB Group is bullish on Asian equities for the first half of 2011, given the surging liquidity which is driving equity re-ratings in this part of the world.

In a report yesterday, the group said the economic outlook for Asia has improved compared to the beginning of last year.

This is backed by the continuing quantitative easing (QE) programme in the US that should help avert the world's biggest economy from dipping into a recession again and from spiraling into a deflationary environment.

Under the QE, the Federal Reserve would print fresh money and buy bonds from US banks, which, in turn, would have more funds to lend. This was expected to spur economic activity.

CIMB (1023) said Asian economies' recent performance has shown that they have decoupled from the West. The economies have remained resilient and are registering decent growth.

The move by Asian central banks to raise interest rates throughout 2010 was also a factor.

CIMB said as a result of the widening interest rate differential favouring Asia, funds globally are flowing into the region. Notably, the MSCI World Equities index rose 3 per cent year-to-November 2010.

Asean markets such as Thailand, Indonesia, the Philippines, Malaysia and Singapore were the strong performers. The region's strong currencies also contributed to the robust performance.

CIMB said its bullish view on Asian equities in the first six months of this year was based on five factors.

The anticipation of quantitative easing activity should help drive positive sentiment in global equities, including Asia, while the widening interest rate differential in the region is attracting funds looking for higher returns.

Global equities are also cheap, with widened earnings yields between bond yields and US treasury yields currently at all-time lows, similar to the levels of the recession in 1929-1933.

CIMB said with the market anticipating further money printing, the yields are likely to stay low for longer.

Another factor contributing to the positive view is that emerging economies are recovering faster than the US, Europe and Japan.
CIMB said industrial production in emerging markets is growing faster than these developed countries, and this will support liquidity flows into the emerging markets.

It also believes that 2011 will be similar to 2006, being the second year of the present interest rate upcycle in Asia.

As long as interest rates are not too restrictive to suffocate economic and earnings growth, stock markets can rally, CIMB said.
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