Credis Suisse Asia Equity Focus Fed move on quantitative easing supports Asian equities

Buy on dips as the Fed sticks to easy monetary policy and quantitative
easing
US equities recovered from day-lows to close at less than 1% lower yesterday after the Federal Open Market Committee (FOMC) issued a very dovish statement and announced plans to reinvest proceeds from maturing mortgage-backed securities (MBS) into longer-dated US Treasuries. Technically speaking, the Fed decision is not quantitative easing as the central bank intends to keep the existing size of its huge balance sheet of USD 2.054 trillion at the current level. However, the market viewed the latest Fed move as opening the path for renewed quantitative easing later this year if the Fed sees US economic growth stalling in the coming months. But the equity rebound was capped by the Fed's more cautious economic guidance that suggested the pace of economic recovery is likely to be more modest in the near term than had been anticipated. Given its more cautious growth outlook, the Fed reiterated its intention to leave interest rates at close to zero for an extended period in line with market expectations.

According to our Global Economics Team, it is unlikely the Fed will substantially increase the size of its balance sheet because the US economy is expanding albeit gradually and the banking system is on a much better footing than before. Furthermore, bond yields and mortgage rates are already very low and it is unclear whether further expansion would bring about more benefits at the margin. According to Bloomberg reports, the related MBS principal payments and maturing debt will total only about USD 150 bn to USD 190 bn over the next 12 months. While we do not expect the Fed to take more aggressive quantitative easing measures at this point, the latest Fed action may fuel market expectations for renewed quantitative easing later this year.

In our view, accommodative monetary policy and quantitative easing should provide further support for risky assets in H2 2010. Low US yields, re-widening of the US trade deficit and rising expectations for quantitative easing are all bearish for the USD. We see more signs of a long-term top of the USD and expect renewed weakness in the USD will drive global asset reallocation into non-USD assets and risky assets. With the benchmark US 10-year bond yield falling to a 14-month low of less than 2.75%, investors are encouraged to shift assets from government bonds into equities where free cashflow yield is standing at 6.8%. We believe the Cycle Clock, valuations and earnings cycle remain supportive of equities and recommend strategic investors progressively add equity exposure to rebuild their overweight positions on any short-term dips. With receding sovereign debt concerns after the European bank stress tests and fading fears of China tightening on increasing signs of a soft landing, we reiterate our overweight strategic position on Asian equities against the region's positive fundamental outlook.