Asia All Set To Decouple Further In 2008

Source : The Business Times, December 28, 2007

AT a personal level, many involved in the financial market universe will no doubt have suffered from the credit market crunch whose after-shocks have reverberated throughout the world's financial capitals since August.

Bonuses paid for 2007's efforts have by several accounts been less generous. And more cost-cutting can be expected. In the bigger picture, however, the world's financial markets have so far weathered the crisis well, thanks no doubt to timely central bank intervention, in the form of interest rate cuts and generous liquidity injections.

So despite the fact that a host of blue-chip US investment banks have announced billions of dollars in losses or provisions related to the sub-prime debt held on their books, Wall Street's blue-chip indices will end 2007 comfortably higher than in 2006. Not even the falling US dollar or the threat of slower US growth in 2008 has been enough to force the US stock market into a dizzy downward spiral. Researchers at US investment bank Morgan Stanley - itself a victim of large losses on the sub-prime front - warn that the US economy could even experience a mild contraction over the coming months.

Others warn that Japan's economy may very well suffer the same fate, and that Germany's economy could run out of puff too.

Closer to home, however, the picture remains more upbeat, despite the fact that Shanghai's composite index has exploded 330 per cent since end-2005. And, compared to where they finished in 2006, Hong Kong's Hang Seng and Singapore's STI are likely to end 2007 with gains in excess of 15 and 40 per cent respectively.

Even Morgan Stanley - which expects US GDP growth to average just 0.8 per cent next year, and for oil prices to hold above US$80 per barrel - doesn't expect weaker US growth to impact on this region by more than half to one per cent of Asian GDP in 2008. Indeed, The Economist now expects China to replace Germany as the world's largest exporting nation in 2008, and to overtake the US as the world's largest economy within the coming decade.

In short, Asian economies' healthy external accounts and accumulated surpluses put them in a much stronger position to weather any inclement economic weather.

Currency forecasts for 2008 tell the story best. While some expect the US dollar to recover against the euro and even the high-yielding New Zealand dollar (or Kiwi) by end-2008, almost all expect it to record yet more losses versus a good number of Asian counterparts.

Based on an average of five end-2008 forecasts that have come our way, the US dollar could be as much as 7 per cent stronger versus the Kiwi in a year's time, but may slide a further 5 per cent towards S$1.37 or so.