It was never going to be a bumper year on global markets with interest rates heading north. After months of downside in Asia and a possible peaking of rates, targeting opportune sectors is the key. Asia's leading stock market indices have shed up to 44 per cent this year. Hong Kong is down 11.91 per cent, South Korea 28.16 per cent, Singapore 25.9 per cent, Thailand 32.02 per cent and the Philippines 31.37 per cent. Only Malaysia has risen to date, by 11.35 per cent. However, analysts remain confident of the Asia-Pacific region's market performance over a six to 12-month period. 'I'm positive on Asia,' Credit Suisse First Boston regional strategist Nitin Parekh said. 'I believe there will be a place for tech [stocks] . . . but there will be broad-based opportunities,' he said. Regional markets, strategists also said, could outperform the global marketplace in the medium term. 'You're at the bottom of the capex (capital expenditure) cycle but furthermore, your credit cycle is starting as well and the US is arguably rolling over,' Merrill Lynch equity strategist Sadiq Currimbhoy said. 'It's kind of hard to be too bearish [on Asia-Pacific ex-Japan] at the moment.' Much of what happens in Asian markets depends on a soft or hard landing of the US economy. With many houses forecasting a soft landing, analysts are optimistic. The harshness of the landing will be dictated by how US markets react to the Federal Reserve's tightening policy as the year progresses. Thus once again, Asian markets are held hostage to severe movements on Wall Street in a rising rate environment. Despite this, financial and utilities stocks in Asia have outperformed other sectors in recent months and could continue to do so in the near term as US rate increases head towards their peak. Mr Currimbhoy believes a soft landing in the US economy will, and is already starting to, translate into a move away from cyclicals and into financials. In that scenario, Hong Kong would lead the way. 'If US rates start peaking out as we expect, then we want to look more at financials,' Mr Currimbhoy said. 'You want to be less cyclical and more financial when rates peak . . . [financials] are at the early stage of performance. I would look at the banking sector and some of the mid-sized banks,' he said, adding that the Dao Heng Bank Group was an example of a beneficiary of this scenario. Others are less inclined to suggest a peaking of US interest rate rises just yet. According to Salomon Smith Barney strategist Han Ong, US rates will rise a further 100 basis points - one reason why the banks were not yet picking up. 'It will take a bit longer yet,' Mr Ong said. There are better sectors that are already growing such as airlines and some of the steel companies. Others have formed a list of counters most likely to surf the 'liquidity-strapped Asian markets', a report on which Prudential-Bache Securities released earlier this week. Strategists John Schofield and Robert Rountree believe 'a difficult to spot but nevertheless occurring liquidity drain' is resulting from Asia's contracting trade surpluses. Recently in South Korea, the government admitted its trade surplus target of US$12 billion is unlikely to be met. Included in their list of stocks likely to come out of the volatility relatively unscathed are Hong Kong's Beijing Datang Power Generation, Citic Pacific, Cosco Pacific; data communication systems group Datacraft Asia and multimedia solutions company Creative Technology of Singapore; and Taiwan Semiconductor Manufacturing. Mr Parekh said some of his top picks were the usual suspects. He included Hutchison Whampoa, China Telecom (Hong Kong), Cheung Kong (Holdings), Sun Hung Kai Properties and Samsung Electronics. Mr Schofield and Mr Rountree said in their report they chose the stocks in their list on themes independent from rising interest rates and those already insulated from any slowdown in US domestic demand. Graphic: ind02gbz
