Credit Suisse Asia Equity Focus Fund inflows into Asia accelerate as double-dip fears ease

Fading double-dip fears and talk on QE2 support fund flows into Asia
The global equity markets tested key resistance levels and closed mixed last Friday as profit-taking activities emerged after the MSCI World edged up for three consecutive weeks. Renewed Eurozone sovereign debt concerns on the widening spreads of Ireland's 5-year credit default swaps (CDS) and a weaker-than-expected US consumer sentiment survey provided a convenient excuse for investors to lock in short-term trading profits. The Thomson Reuters/University of Michigan consumer confidence index unexpectedly declined to 66.6 in September from 68.9 in August, hitting its lowest level since August 2009. This reflects the bumpy road to recovery of the US consumption market. Looking ahead, the equity markets should remain dominated by macro concerns and with the Federal Open Market Committee meeting due to take place tomorrow, investor attention should focus on the Fed's policy statement on quantitative easing.

In our view, the latest set of economic data from the US and China is a positive signal for a successful soft landing of the global economy. These supportive global macro data help defuse double-dip fears and revive global risk appetite, which should support a further extension of the recent equity rally going into Q4 2010. Our
Global Economics Team believes the continued recovery of the US economy should give the Fed time to postpone a decision on additional quantitative easing measures for now. However, the unacceptably high unemployment rate will drive market expectations for more quantitative easing measures in the next 3–6 months and this is likely to keep US yields low and lead to a further significant USD weakness in the coming months. This should bode well for Asian equities, as historically the region has outperformed during previous periods of significant USD weakness.

Driven by easing double-dip fears and a revival in global risk appetite, inflows into non-Japan Asian equity funds accelerated to USD 936 m during the week ended 15 September, 1.8 times higher than the USD 338 m recorded in the previous week, when Asian funds witnessed a turnaround in the outflow trend. We note that Asian funds recorded strong inflows after China released the positive August economic data, which reaffirmed the outlook for a soft landing. Four-week average inflows into Asian funds also edged up last week. The Asian country funds which attracted the most inflows last week were China and India, which experienced inflows of USD 147 m and USD 144 m respectively, thanks to their robust economic performance.

Strengthening inflows into Asian funds contrast with net outflows of USD 120 m from global equity funds and USD 148 m from Japan equity funds, which were hit by the lackluster recovery in the G3 economies.

Against the positive macro backdrop, favorable earnings cycle and renewed USD weakness, we reiterate our strategic overweight position in Asian equities for the next 6–12 months. We recommend investors take advantage of any short-term tactical corrections to rebuild strategic overweight positions in our recommended BUY-rated growth-sensitive Asian equities, including Angang (347 HK, BUY), CNOOC (883 HK, BUY), Orica (ORI AT, BUY), PTT (PTT TB, BUY) and Rio Tinto (RIO AT, BUY). To escape from zero returns in an extremely low-yield environment, we also advise investors to add selected Asian high-yielding stocks to enhance portfolio returns, including Frasers Centrepoint Trust (FCT SP, BUY), ANZ Bank (ANZ AT, BUY), Nintendo (7974 JP, BUY), SATS (SATS SP, BUY), BOC Hong Kong (2388 HK, BUY) and Keppel Corp (KEP SP, BUY).