Citigroup Asia Macro and Strategy Outlook - Asia’s Fallout from EU’s Sovereign Crisis

 Growth Fallout: Not yet, but Asia's growth momentum might have peaked. —
Fiscal austerity and potential strains in banking systems will probably be a drag
for Eurozone growth, but we see no impact on Asia yet. Nonetheless, we think
momentum has peaked on both external demand risks and China’s more
aggressive move to slow property investment. We find that growth in Singapore,
Taiwan, Hong Kong, Malaysia, Korea and Thailand are more sensitive to a Euro
area growth downturn, while the domestic-demand driven economies of India,
Indonesia, China and the Philippines are relatively more insulated.

 Policy fallout #1: Delayed Fed and Asia CB policy tightening — We have
delayed most rate hike calls in Asia on the back of delaying a Fed hike to 2Q11
(from 4Q10). Timings of the initial rate hike in Indonesia, Taiwan and Thailand
are pushed back to 1Q11 from 2H10 while the Philippines' is pushed to 4Q
(from 3Q). We also reduce the amount of hikes this year from China and Korea
– BOK to hike only 25bps in 4Q and China to hike two times (+54bps) starting
in 3Q. For most countries in 1H11, we reduce the amount of hikes by 25-
50bps. Malaysia is an outlier, with another 25bps hike expected in July, though
this is a close call.

 Policy fallout #2: Less RMB appreciation — We still expect an imminent RMB
move, but RMB strength on a trade-weighted basis with the sharp EUR sell-off,
as well as growth concerns, will likely mean authorities will opt for a slower
pace of appreciation.

 Market fallout: Asia has so far been a “low beta” risk asset — Contagion via
financial linkages has been evident, but with fundamentals in the region
looking strong and less externally vulnerable than others. Asia FX, credit
spreads, and to a certain extent, equities (in $ terms), have fared better than
others.

 Macro strategy — 1) Asia FX – We remain positive on Asia FX and expect it to
diverge with the EUR over the medium term; our top picks are KRW, INR and
PHP; 2) Asia rates – We are biased to receive rates selectively on delayed hikes
and relatively manageable inflation pressures – we would look for opportunities
to receive rates in India (5yr INR OIS), Korea (front-end) and Thailand; and 3)
Asian (sovereign) credits – we opt for lower versus higher beta names in this
risk environment – e.g. we like Philippines over Indonesia.