LONDON: Investors should turn to Asia for China-led share gains this year rather than rely on further advances in European equities or on Wall Street, European strategists and fund managers say.
“Asian equity markets will probably do better than the United States,” said Roland Lescure, head of strategy at CDC IXIS Asset Management. “We’ll see a relatively poorer performance in Europe even if the euro drops back.”
Even if China gives in to pressure from the US to revalue its yuan currency, growth will steam ahead drawing in imports from other countries in the region, including Japan.
China’s economy is thought to have grown by more than 8% last year and while it has a huge trade surplus with the US, it has swung into deficit with many Asian countries from which it imports components and machinery.
Strategists recommend industrials in Asia and stocks in the raw materials sector - set to rise on higher commodity prices. “Chinese imports are exerting a very strong influence on growth in Asia,” said Michaela Marcussen, associate director at SG Asset Management.
Some think that China will boost Japan’s growth and equity markets, so long as the Japanese authorities succeed in curbing yen strength against the dollar.
Dollar weakness on worries about the massive current account deficit recently pushed the yen to three-year highs and raised the prospect of dwindling exports - vital to Japan’s growth.
“They need to keep yen appreciation under control. Exports to China should help Japan’s economy to grow,” said Khuram Chaudhry, strategist at Merrill Lynch.
“If consumer demand in Asia grows, car sales and real estate companies could do well. Europe is struggling to find its own engine of growth even though earnings are higher. Euro strength is a problem.”
The euro has risen to successive new lifetime highs against the dollar, is up nearly 50% since January 2002 and has eroded the competitiveness of dollar-earning European companies.
“It’s unlikely we will see the euro depreciating this year,” said SG’s Marcussen. “A dampening factor for European equities.”
Another reason given for lagging European stocks in 2004 is lack of political will for structural and labour market reforms.
Politicians in Europe, with an eye on elections, have only made half-hearted attempts to improve the framework within which companies work. “A lot depends on reform,” said Merrill’s Chaudhry. “Another key question concerns European consumer spending.”
Consumer confidence and demand, vital for corporate pricing power, does appear to be improving, but strategists think it won’t be strong enough by itself to boost equity markets unless exports grow as well.
Meanwhile, the weak dollar has boosted US exports and enhanced corporate earnings, but some are fretting that a dollar crisis may put a brake on investor demand for US equities.
“If the dollar falls much further people could lose confidence in it and the US stock market. There would be a knock-on effect in Europe and Asia,” said CDC’s Lescure.
“People would liquidate stock holdings and eventually turn to government bonds, but we don’t think it will happen. If the dollar stops falling then you want to be in European markets. There’s more value there.”
Strategists say the real risk to US equity markets is higher interest rates, currently at 45-year lows of one percent and higher bond yields, which raise the cost of borrowing for companies seeking to expand and invest.
After Friday’s weak US non-farm payrolls data money markets have moved back the timing of a rate hike by the US Federal Reserve, which should support US equities. “But growth will remain strong, bond yields will rise and US equity markets will slip,” said Merrill’s Chaudhry.
A big problem for the US is the explosion of household debt, which could derail economic growth as higher rates, possibly later in 2004, bite into consumer income.
“We will see probably a correction in the US savings balance, which could undermine growth,” said SG’s Marcussen. – Reuters