CITI Asia Macro and Strategy Outlook

Balancing Act after the Rebound

Asia’s growth is expected to rebound quite sharply in the 2Q 2009 then taper off gradually in the second half. Recessionary forces in the developed world are easing as policy efforts are gaining traction, while aggressive monetary and fiscal policies across Asia and strengthening momentum in China are supporting the region’s upturn.

We think the export momentum in Asia will shift between tech and non-tech exporters. We think the tech-driven re-stocking effect supporting the export rebound in Korea, Taiwan and Singapore NODX will lose momentum, while exports of laggards like China, Malaysia and Thailand should pick up gradually alongside global growth.

Inflation in Asia has largely bottomed and we expect some central banks will shift their language by this year and policy rate next year ahead of the US. Headline inflation should remain very benign in the coming months on base effect but is expected to notably reverse by year-end for India and China, alongside growing concerns on the lagged impact of loose liquidity conditions feeding into asset prices and inflationary expectations. From historically very low levels, we expect BOK will be the first to hike rates (1Q 2010F), followed by RBI (2Q 2010F), BI (mid-2010F) and PBOC (2H 2010F).

We remain fundamentally bullish Asia FX over the medium to longer term but expect more range-bound trend in the short-term. We expect some consolidation of short-term risk appetite, but longer-term appreciation story remain intact on stronger growth prospects, robust external positions and CNY undervaluation anchor. Our most aggressive FX appreciation forecast vs. spot in 12 months are in KRW, IDR, INR and MYR.

We maintain our steepening bias on local rates. We would look to pay longer end rates in CNY and INR where growth momentum is strong as well as TWD where rates sell-off have considerably lagged. Front-end sell off looks overdone – rate hikes are neither imminent nor sizeable and carry and roll to receiving looks attractive in INR, KRW and THB. We would also look to go long shorter-end IDR bonds on pull-backs.