The impressive rally in equity markets over the past five weeks begs the question whether having seen the worst of the recession the stage is set for growth, in which case this rally may be sustainable.
In our view, while China is recovering from the first of its two “dips” during 2009-2010 (the second trough in growth will likely be in 2010Q2) – we think it reasonable to expect that the rest of Asia will follow the US and European economies’ growth trajectory, with the trough coming around mid-year.
Picking the time in which growth bottoms out is important because equity markets in Asia have tended to begin to rally only when YoY growth troughs – not when QoQ growth starts to improve. Hence, we think this equity rally is not well founded in fundamentals and could well reverse in the coming weeks. We would be more comfortable with a rally starting around mid-year.
However, that does not mean to say we see that as the beginning of a sustained bull market. We are not as impressed with US official efforts to restructure the banking system as the markets seem to be. The Fed and Treasury policies may restore some stability – at least temporarily – to the banking system, which would itself be positive for growth. But we think a recapitalization of the US and EU banking systems is necessary for private sector demand growth to be sustained. Without a resolution of the capital deficiency, the outlook is for uneven and generally disappointingly low growth in our view. This would mean the same for Asia’s small open economies.
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