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HSBC sees Asia in 'sweet spot' again

HSBC

Good economic news and money fleeing richly valued United States assets should put Asia in the 'sweet spot' for another year of solid gains, although nothing like the 40-plus per cent market jumps that occurred last year, according to forecasts released by HSBC's Asian equities team.

In a presentation last week the bank advised investors to look forward to double-digit gains across Asian markets, with top picks of Taiwan, China and India. The core driver was an improvement in earnings outlook, with Asia currently trading at historic lows on the basis of price/earnings on both actual and forecast earnings.

The outlook for Hong Kong was neutral, with analysts forecasting the market is likely to rest for a while to digest the 35 per cent advance last year. Longer term, HSBC says Hong Kong will get back in the saddle when the benefits of cross-border economic co-operation and a relaxation of mainland tourist rules run through to the bottom line for property, banks, media and consumer plays.

Region-wide, Asian equity markets were up 45 per cent in US dollar terms, marking the third year in a row the region outperformed the US and Europe. 'Despite euro strength, we actually had better returns from Asia in US dollar terms for 2003,' said HSBC's director and chief investment officer, equities Asia Pacific, Ayaz Ebrahim. 'Our view categorically is that we think Asian equities will continue to do well.'

The key themes driving regional markets in the year ahead are growing domestic consumption and asset inflation fuelled by a continuing soft global interest-rate environment. HSBC estimates the Fed is likely to go slow on any rate increases in the months ahead, with a 115-basis-point increase by the end of the year.

Mr Ebrahim said GDP growth around the world would be on the high side, with the US, Britain and Asia (ex Japan) powering along at 4.2, 2.5 and 6 per cent respectively.

'We believe in a strong [US] first half in 2004, going back to trend growth in the second half, but trend growth still means the high twos, which gives impetus for export growth from Asia,' he said.

He said Asian markets remained inexpensive relative to global equity and bond prices. The attractive valuations are a key factor behind rising fund flows to Asia.

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