Weak greenback a tonic for Asia
Mainland exports are likely to gain, but the benefit for Hong Kong is limited due to its services-orientated economy
The almost convivial response by United States Treasury Secretary John Snow to the dollar's dramatic decline in recent months suggests a weak greenback is here to stay. The euro has gained 17 per cent on the dollar over the past year, and yesterday's quarter percentage point interest-rate cut by the Federal Reserve makes that trend likely to continue in the medium term.
Many Asia-based economists say it is just the tonic regional equities need, leaving them primed and ready for take off. Others, however, are less convinced and say mitigating factors could leave stocks spluttering on the runway for a good while to come.
The nub of the bull argument is that a weaker dollar means more Asian exports to the United States. History has shown this to be the case.
'Periods of a weakening US dollar have been associated with bull markets in Asian equities. Conversely, a strengthening dollar, as in 1981, 1984, and the mid-1990s have led to crisis in Asia,' said Ajay Kapur, regional head of strategy at Citicorp Smith Barney.
A depreciating greenback leaves Asian currencies closely tied to it - such as the Hong Kong dollar, the yuan and the ringgit - weaker. And according to ING Financial Markets Asia chief strategist Markus Rosgen, this makes their economies more competitive in global trade.
As the US is the largest buyer of Asian exports, Mr Rosgen said US import prices will rise, in turn triggering rises in Asian export prices and bolstering regional equities as the US dollar value of global trade increases. As a result, Mr Rosgen predicts Asian markets will be up 17 per cent form current levels by the end of the year with the Hang Seng Index nudging 11,000 points.
However, Dong Tao, Credit Suisse First Boston chief economist for Asia ex-Japan, said it was 'debatable' whether Hong Kong would benefit significantly from such a rampant rise in Asian exports.
'Hong Kong doesn't really produce much these days,' he said, adding that while Hong Kong manufacturers that have production bases in China would benefit, it would not necessarily mean the rest of the territory would as well. 'The owners' pockets could get fatter but doesn't mean it will directly translate into Hong Kong's GDP [gross domestic product],' Mr Tao said.
The engine room of any great escalation in Asian exports would inevitably be China, but Mr Kapur was not convinced the mainland was capable of such an exponential increase.
'Economies that grow at 10 per cent normally slowdown,' Mr Kapur said, referring to China's first quarter growth of 9.9 per cent. Mr Kapur said China's economy was already overheating and was likely to slow down this year, adding that his pessimism was not based on valuation as mainland stocks were still quite cheap.
Mr Kapur said while Chinese exports to the US were likely to be 'extremely strong', exports to Europe, Japan and Asia were likely to slow down, adding that the yuan depreciating with the dollar did not equal cheap Chinese exports to Europe. Mr Kapur said such notions were 'empirically incorrect'.
Furthermore, he said a lot of China's growth in the past few years had been driven by infrastructure and capital expenditure and was therefore 'entirely discretionary'.
However, ING's Asia chief economist Tim Condon remains unrepentantly bullish, citing a series of factors that indicate a robust regional rally is right around the corner. He said the fallow period from mid-2000 until the start of this year has been characterised by falling bond yields and stock prices. But since April, stock and bonds have been rising, generally meaning falling inflationary expectations.
'The region is primed to take off should anything encourage investors to move into higher-risk, higher-return assets,' Mr Condon said, adding that continuing dollar weakeness would be the likely catalyst.
In this optimistic scenario, Hong Kong equities set to take off include outsourcing, conglomerates and consumer plays.
The brokerage said aluminium producer Chalco or Aluminum Corp of China represents a great buy because China's fast-growing aluminium consumption of 11 per cent per annum plus strong alumina prices at present means the company is set to post 93 per cent earnings per share growth this year.
Wharf (Holdings), through its container port operation, which accounts for 40 per cent of the company's earnings, is expected to continue to benefit from strong China trade. Also, the resurgent retail sector is boosting Wharf's rental income from its shopping malls.
Another tip is exporter Fountain Set, which is set for 15 per cent average growth each year until 2005, as the company rapidly gains market share in the US.