Hong Kong Speakers Highlight Nascent Dim Sum Market, Agree QE2 in US Will Lead to Cash Inflows to Asia
EMTA’s Fifth Annual Forum in Hong Kong was held on Friday, October 29, 2010 at the JW Marriott Hotel. ING sponsored the lunchtime event. About 100 market participants attended including portfolio managers, research analysts and salespeople.
Tim Condon (ING) led the discussion, asking panelists to discuss the outlook for the global economy. There was general consensus amongst speakers on a benign international environment, with US monetary policy benefitting Asian economies and leading to continued streams of cash inflows.
Johanna Chua (Citigroup) observed that the market had been “in a frenzy” recently, with original estimates that the US FOMC’s upcoming quantitative easing program could reach as high as US$1 trillion. Chua believed that the market was subsequently digesting lower money-printing expectations.
Following the controversial comments by Brazilian Finance Minister Mantega, panelists also addressed fears of currency wars. Suvir Mukhi (Income Partners) downplayed the risk of a currency war, rationalizing that such an event was neither in the interest of Washington, DC nor Beijing. Chinese inflation would lead to a real appreciation of the yuan and reduce Chinese competitiveness.
Chua predicted that in a dollar-flooded market, investors would be tempted to take on more risk. She stated that the history of sudden large inflows into emerging countries has not been pretty,” and central bankers were justified in their concerns to control potential “hot money.”
The potential for the “dim sum” or CNH market (yuan-denominated bonds issued in Hong Kong) was also a panel topic. There was general agreement that the nascent CNH market is a step towards convertibility of the Chinese yuan (CNY) –albeit just an initial move; as it is offshore, it would remain separate and distinct from the CNY. Mukhi forecast that the dim sum market could grow exponentially, as banks, state agencies and later corporates take advantage of it to issue debt.
Chander noted the explosive growth of this market already in the three months since inception, and described it as potentially reaching $1 trillion in size within 5-7 years. “The Chinese will want to keep the CNY from being convertible, at least for a while,” he underscored.
Condon reminded participants of their correct call on “market darling” Indonesia at the 2009 event. Panelists unanimously concurred that Indonesia could be awarded investment grade ratings in 2011. “I think it is priced in already,” observed Chua.
On a structural note, the future bodes well for EM, panelists agreed. Macquarie Fund Management’s John Bugg offered his assessment that “the world is waking up to the fact that the Asian markets are strong; in contrast, developed countries have structural problems that won’t be fixed in a hurry.” Bugg argued that growth assets must be used to fund pension liabilities, and the “2% returns in developed countries don’t do that.”
Chander pointed out that sovereigns such as Brazil and Indonesia already trade inside Italy; and that the share of global investments in EM is below EM’s share of global GDP. “This structural shift in investments from developed markets to EM is permanent,” he declared.
Talk of market bubbles was largely discounted. Chua cited credit upgrades and strong balance sheets as justifying EM equity pricing; and also believed fundamentals supported commodity pricing levels. Panel members expressed little anxiety on fixed income levels-- “we see a good year in fixed income in 2011, though not as good as in 2009 or 2010,” Mukhi stated.
What are the risks in the market? “In buying Asian FX, you are betting against Central Bank intervention,” stated Chua, who added that some central bankers (e.g. those in India, Philippines, and Singapore) appeared to be more tolerant of appreciation than others. Chua also cited political risk/protectionism, excessive leverage, and an expiration of tax cuts in the US (“which would have a temporary effect, though not a Lehman effect.”)
Chander would monitor food pricing, noting this was not currently priced into the market while having been a market concern in recent years. Oil rising over $100 per barrel, and a more aggressive China (perhaps taking a more belligerent stance on islands whose ownership is disputed with Japan) could also disrupt the market.
How Asian central banks can absorb new inflows of cash remains an issue, according to Mukhi. A property bubble rising from such inflows remained something to watch. Capital controls might not be sufficient to fight sudden dramatic inflows, “people will pay those costs,” he added. Finally, inflation was a potential concern for Bugg, although he acknowledged this was not something that was “worrying me too much.”
The panel concluded with top investment recommendations for the next twelve months. Chua advised attendees to buy the KRW, SGD and Philippine peso. Additionally, Chinese equities “have lagged and have some catch-up potential.” Mukhi spoke enthusiastically on Chinese properties, as well as the Shanghai equity index and gold. Bugg gave a third vote to Asian equities, especially airline and utility stocks.
On a contrarian note, Chander believed peripheral Europe now offers opportunities. “I would consider 5-7 year Greek bonds.”