Investment Case

Policy traction over the past year has more resembled the pain and trauma of the medical treatment called traction, rather than the traction of a car’s wheels getting a grip on an icy road! In Asia in 2009, a key differentiator will be successful policy traction. We believe that we are in the midst of the most aggressive policy stimulus in Asia on record. The success of this stimulus, however, will depend on the traction it achieves in a context of record global headwinds.

Why Has Policy So Far Failed in Asia? Asia Only Started to Ease 4 Months Ago
Whilst the Fed began to ease policy in Sep-07, the first material easing of policy in Asia was a year later! This reflected the inflation threat posed by the record commodity boom, which only peaked in July-08. In addition, until the collapse of Lehman Brothers in mid-September, the economic impact of the US slowdown on Asia had appeared limited.

But Asia Policy Is Now “Foot to the Floor”
Since September, however, Asia policy rates have been cut by 205bps, virtually reversing the tightening from 2003-08 in four months. Looking ahead, our economists expect rates to decline by another 135bps to 2.8 percent.  A move of at least this margin seems likely, given: 1) the collapse of inflationary pressures; 2) weak growth indicators (Asia’s exports have collapsed); and 3) the decline in G7 rates to Post-WW2 lows (with the US at ZIRP). Indeed, we foresee interbank rates reaching about 1 percent in core Asia in the next few months.

Fiscal Policy as a Powerful Complement to Rate Cuts
Asia has announced unprecedented fiscal stimulus in the past three months, including China with US$586 billion or 16 percent of GDP, Taiwan: US$17 billion or 4.5 percent GDP, Korea: US$43 billion or 4 percent of GDP, Australia: US$11 billion or 1.2 percent of GDP, Malaysia: US$2 billion or 1.2-percent GDP, Thailand: US$3 billion or 1.2-percent GDP, and India: US$9 billion or 0.8-percent GDP.
Altogether, assuming this stimulus is spread over two years, it could amount to about 4 percent of GDP per annum. We would also expect additional stimulus measures to be announced in the near future. Within Asia, given China’s 45-percent share of regional GDP, the sheer size of its fiscal package, and its status as No. 1 trading partner for most Asian countries, the China fiscal stimulus is a key to the regional outlook.

Industry Policy as Another Source of Stimulus
Industry policy is also being used as a means to stimulate growth. In China, for example, the sales tax on small cars has been cut from 10 percent to 5 percent. China, India, Malaysia and Indonesia have also all reduced fuel prices. More importantly, China has announced multiple stimulus measures to turn around its property sector, including lowering property taxes (urban real estate, VAT, stamp duty, deed and business taxes), slashing mortgage rates by 250bps to 4.16 percent, and easing access to mortgage credit (downpayment from 30 percent to 20 percent) and property loans.

On the fiscal side, policy traction is determined by its speed of implementation, particularly with infrastructure projects, and the propensity to consume or invest on the back of Government transfer payments or incentives. On that score, China appears capable of rapidly accelerating its infrastructure spending, given its impressive track record and the 4Q08 surge in bank lending, and providing income support to households with a high propensity to consume.

Ways to Play Asia Policy Traction
We expect policy traction first and foremost in China. Laggards should include India, Indonesia and Malaysia, which have been slow to cut rates, or have cut rates but have not seen a strong response in market rates. As such, we favour China-plays, including infrastructure/ construction (e.g. Chinese railway builders), construction materials/bulk commodity shippers, consumer (e.g. Belle, China Mengniu, or Far Eastern Department Store in Taiwan on the consumer voucher scheme), the large-cap China banks and the China property sector. Below, we highlight the China property sector and Hong Kong small banks.