Look forward to another stellar year for Asian equities driven by a global landscape of low inflation and continuing easy money policies, according to a 2004 prospectus released by Citigroup Smith Barney. With little likelihood of the United States raising interest rates during the next six months, the Asian equity rally should continue throughout this year, with share prices gaining 15 to 20 per cent by June, according the brokerage's bi-weekly The Asian Investor. The report says investors are underestimating the scope for central banks to remain accommodative in a global environment that shows few signs of inflation. 'The European Central Bank is more likely to ease than tighten in 2004,' says regional strategist Ajay Kapur, summarising the consensus of the brokerage's global economics team. 'Similarly, a patient [US] Fed probably will not begin to raise rates until the later part of 2004. Normalisation of US policy rates is likely in 2005 to 2006, not in 2004.' He also says the Bank of Japan is likely to maintain its zero interest-rate policy for the foreseeable future. With few prospects of interest-rate increases, the only worry to Asian markets may be investors who try to second guess the Fed by acting well in advance. Based on a historical study of the past seven credit-tightening cycles, these moves usually occur no more than two months in advance of an interest-rate tightening cycle. 'We find that equity markets do not show a long lead over monetary tightening by the US Fed,' Mr Kapur says. 'Be patient and wait till the Fed is getting closer to hiking rates before trimming back.' The effect of interest-rate increases on share prices is anything but clear, the report says. On average, US equities rise 12 per cent in the six months preceding rate increases; after the Fed action, the market flattens out over the next six months. Asia equity performance is more volatile, rising 20 per cent in the six months preceding a rate increase. In the six months following, Asian is down in only two of seven cases On the inflation front, the only worry spot among leading G4 countries is Britain, where the Bank of England has already raised the policy rate 25 basis points on signs consumer prices are heating up. This contrasts with the US, Germany and Japan, where leading inflation indicators appear benign, the report says. Capital expenditure in the US, Germany and Japan also shows signs of recovering this year, while expenditure in China is expected to level off. The report says rising consumer spending should replace any declines in capital expenditure as a source of economic growth. Mr Kapur says Hong Kong shares should post solid gains this month due to what is known as the 'January effect'. During the past 30 years the index has risen in 18 instances during the first months of the new year. In most cases, the property sector outperforms. Investors should keep an eye on bricks and mortar plays this month, Mr Kapur says. 'We would not be surprised to see this next year as the sector is back in vogue and it has shown a consolidation of late.''