Asia Thriving But Not Insulated From External Factors

Source : The Straits Times, Nov 1, 2007

US recession, inflation and surging oil prices will affect regional economies: Analysts

ASIA is booming but an explosive mix of rising energy prices, inflation and the sliding greenback could wreak much damage, warned Singapore-based experts.

And despite talk that Asia's economy is decoupling from the United States, the region will not be insulated from a US recession, which could hit next year.

The warning came from analysts speaking at yesterday's relaunch of Pulses, a monthly investment magazine from the Singapore Exchange, which will now be produced by The Business Times starting from its January issue.

Citigroup economist Chua Hak Bin said: 'If the US sinks into a recession, Asia will feel it. There are signs that some exports are slowing, but the good thing is that there are some domestic demands.'

Mr Hugh Young, managing director of Aberdeen Asset Management, agreed: 'While Asia has decoupled economically, it has integrated in a financial sentiment sense. So, if things do wobble sentiment-wise in the US, that could have a knock-on effect in Asia.

'Energy prices are going to be a destabilising force, especially in poor economies,' he added, citing the unrest in Myanmar. 'It could be a very volatile world in the next 12 months.'

The Singdollar is expected to hit a record 1.37 against the US dollar by the end of next year, said Dr Chua, adding that oil prices crossing the US$100 mark is not too far away. The Singdollar is now at 1.45. 'On the other hand, Asian currencies have a huge way to go, as far as appreciation is concerned,' said Mr Young.

Inflation was cited as another concern. Dr Chua said: 'The difference between now and three years ago is that inflation numbers are now within a discomforting range for central banks.'

Mr Young is also worried about the level of inflation. 'At the same time you've got rates being cut because of the US sub-prime issue, yet some central banks are raising rates due to inflation and that causes distortions.'

The risk of slower US growth in the first half of next year and rising inflation in economies like China mean investors will not get the same stock market bull run as this year. 'Our equity strategist has shifted to a more defensive mode given where valuations are,' said Dr Chua.

Bank stocks are going to pick up strongly, and the marine and offshore engineering sector is also likely to do well, while telecommunication stocks, which give generous dividends, are also favoured, said Dr Chua. But exporters will be hit as the US dollar continues to sink further.