The safe-haven appeal of Asian markets will ensure currencies in the region end 2012 stronger than they are now, despite the sizeable risks from Europe's debt crisis and weaker global demand, a Reuters poll showed. The poll of 74 participants, mostly strategists and economists, cited the extreme oversold positions in the Asian currencies as an additional reason for optimism, besides regular factors such as the attractive valuations and stronger regional balance-sheets.
The South Korean won and Indian rupee would lead the rally over the next 12 months, the poll forecast, while the Chinese yuan and Indonesian rupiah would underperform. Several respondents expect currency volatility to remain high so long as investor sentiment swings between the fears of a slowing global economy and waning appetite for risk exposures on one hand and the expectations of possible fresh stimulus from central banks in Europe, the United States or China, on the other.
"Our year-end forecasts make one big assumption and that is that, eventually, market tensions will calm and politicians and central bankers will do the 'right thing'," analysts at Credit Agricole said in a note detailing their FX forecasts. "Maybe we are looking on the bright side and expect too much from policy makers, but currency markets are fickle. A whiff of progress towards crisis resolution could even make our perhaps optimistic forecasts look dour," they said.
The poll showed the currency most correlated to global growth and risk, the South Korean won, has not only been relatively resilient in the big selloff since May, it is also set to outperform its peers over the next 12 months. The poll forecast the won gaining 6.6 percent to 1,100 per dollar by May 2013.
The Chinese yuan would rise just 1.3 percent by November 2012, and 1.9 percent by next May. Asia's worst performer so far this year, the Indian rupee, was also seen gaining 3 percent by November and 6.5 percent by May. The rupee, still hovering near its recent record low of 56.52 per dollar owing to policy ineptitude over tackling a wide current account deficit, fiscal slippage and falling investment, has fallen enough to reflect these underlying vulnerabilities, analysts said.
In contrast, another underperformer, the Indonesian rupiah was expected to remain under pressure, rising just 1 percent by November. The rupiah has been sheltered by Bank Indonesia's verbal intervention and controlled access to dollars onshore, and might weaken further as foreigners try to leave the market.
Through May and for several days this month, market participants have ignored both valuations and strong fundamentals in emerging markets, fleeing instead to the safety of the dollar or yen, US Treasuries or German bunds. That situation is unlikely to change until the Greek election on June 17, which is the most immediate event risk in the simmering euro zone crisis. But there's plenty else over the next 12 months giving cause for worry and caution, including a US presidential election and pre-agreed fiscal tightening in the United States and China's ability to cushion a slowing economy.
The euro zone's problems so far seem contained within its borders, but analysts suspect the dithering over fiscal union, back-stopping of Europe's struggling banks and political brinkmanship will get in the way of any sustained relief or rally in global equity markets.
Analysts expect the broad-based weakness in economies will prompt synchronised policy easing in the form of rate cuts in China and the euro zone and balance-sheet expansion in Japan, the United States, Europe and United Kingdom. China cut rates for the first time since the crisis on Thursday.
But the jury's out on whether further stimulus will spur reluctant banks to lend aggressively and for consumers to be less cautious spenders. That makes it reasonable to assume further easing may not necessarily cause a rally across markets, as it did in 2009 or 2011.
Against that backdrop, Asia's relatively healthy economies, robust banks and solid balance-sheets bolster its status as a refuge for real-money investors. "We're at a point now where, if I am global investor, am I going to sell my Asian investments?" said Patrick Perretgreen, head of Asia strategy at Citigroup. At the most, investors might offload their holdings of equities, he reckoned.
"The leverage in Asia is much less than it was, the move in CDS has been very muted, trading leverage is very low and I think when we get to the latter part of this year, Asian currencies will be better." There are other reasons to be bullish. The interbank funding markets have been well-behaved this year, unlike in 2008 or 2010 when excessive reliance on dollar funding hurt banks in Korea, Thailand and other parts of Asia.
"The relative stability of the interbank funding markets as well as the cross currency swap markets so far vis-à-vis last year remains one reason to feel constructive, in our view," Morgan Stanley said in a note. Heavy selling in May has pushed values to extremes, where they seem to be great buys. For instance, market participants estimate short positions in the rupiah are the largest since November 2008, while shorts in the yuan are at two-year highs.
The MSCI Asia-Pacific ex-Japan slumped 10.9 percent in May. It is up just 0.9 percent so far this year. May's losses have pushed earnings multiples for Asian stocks to about 10.3 times forward 12-month earnings. That compares to an average of 12.5 times over the past decade, according to Thomson Reuters I/B/E/S. In October 2008, multiples had fallen to as low as 8.7 times.
Likewise, high-yielding bonds in Indonesia and Malaysia have been sold off, but analysts expect they will soon become attractive as oil prices decline and the inflationary environment turns more benign. The big threat to the view remains Europe. Several forecasts and assumptions could come undone if the euro slumps, heading for parity to the dollar and causing a huge upheaval in trade-weighted indexes and long-term portfolios, analysts said. The euro has been around $1.25 for the past month.
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