Asian bubble ahead in 12 to 18 mths: RBS

By LYNN KAN

IN the next 12 to 18 months, investors should see a bubble in Asian equity prices, but one that will not be supported by similarly rosy news of economic growth, says RBS' head of regional strategy Emil Wolter.

Mr Wolter: Few of the debt-ridden advanced economies have bitten the bullet and cut debt

There will be a reversion to pre-crisis days, he says, in that asset bubbles will make a reappearance. Moreover, the engines of growth in the global economy will return to being debt-driven for developed economies and export-dependent for developing ones as countries - the US, Japan, Europe and China - have all seemingly scuppered their commitment to global rebalancing in recent weeks.

'A natural consequence of zero interest rates and lots of easy money is that investors will face an environment in the next 12 to 18 months that will be much more about multiple expansions than it is about cash flow growth and earnings,' he says. 'It'll be about paying a higher price for pretty much the same thing instead of the market going up in line with earnings.'
He observes that few debt-ridden advanced economies have actually bitten the bullet and cut debt, save for Ireland and the UK. 'The US is back to creating more debt to deal with debt. Hedge funds are back in their stride, leverage buy-outs and private equity transactions are back. It's been a clear U-turn,' he says.

Japan, too, has added to global imbalances with the printing of more money and effective devaluation of the yen. 'This has been a fantastic excuse for other central banks in Asia also to revert back to mercantilist behaviour that they had been showing since the Asian Financial Crisis.'
At the same time, China has firmly not let its currency appreciate enough despite depegging it from the dollar, hanging on to its export-led and speculation-led model of growth instead of boosting domestic demand.
The maelstrom of policy reversals has led him to revise his expectations of a 30 per cent correction in the Asian stock markets. Instead, he predicts an asset bubble forming in the next 12 to 18 months.
'It's likely to form because emerging markets have the basic necessities for a bubble forming. There's a good fundamentals story and, of course, there's a lack of better alternatives anywhere else. There's excess speculative capital flushing around and although the markets have been quite strong the last four weeks, it's likely only the tip of the iceberg,' Mr Wolter says. 

Though the Chinese government has raised interest rates this week to curb domestic inflation, he believes Asian stock markets will not be halted in their ascent.
'I see little impact. The cost of capital is much less important than the availability of capital. On average, higher interest rates are bullish to the financial sector through an expansion in net interest margins or investment yields to insurance companies. What does impact the market is the increase in money supply - which is happening and that I see climbing to 20 to 25 per cent over the next four months - that will set the Asian stock markets on fire.'

In fact, the Chinese and Singapore property markets - two countries whose governments have imposed property price curbs - are sectors he's bullish on. He names Soho China and Guangzhou R&F as examples.
He's also overweight on the financial sector in Singapore, Thailand and Taiwan, choosing OCBC, NAB, ChinaTrust and Bangkok Bank.

Energy commodities are good plays in his opinion, in particular oil, because 'it's lagging other commodities'. 'Investors should also focus on rig builders and offshore structure builders because we see order flows coming in,' he says. 

In terms of countries, he is overweight on China, Singapore, Malaysia and New Zealand. Indonesia, India, the Philippines and Australia are, however, countries he's underweight on in Asia.
Ultimately, investors can ride a bubble for the near-term, but in the long-run the need for global rebalancing remains the elephant in the room even as policy reversals take place.