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UBS forecasts economic outlook for Asia in 2008
Asia's economic growth will slow in 2008, says UBS's Duncan WOOLRIDGE, UBS Regional Head of Economic Research. Sakthi SIVA, Strategist at UBS Investment Research believes that investors need to be aware of the region's four key investment themes: overvaluation; the Shanghai bubble; switching from domestic defensives to exporters; and the exposure of the materials sector.
"Asian growth will slow but there will be no meltdown", says Duncan Woolridge. "What will impact the region is not the slow down in US growth but more so European growth."
Wooldrige believes that US weakness is already being felt across Asia but that the region's exports to Europe could be affected by the sharp drop in sentiment and leading indicators over the past few months.
He points out however that the impact of slower exports will have less of an affect on Asia than in 2001 when the US experienced its last slow down. "Look at Asia today; debt levels in most economies are relatively low; there are no obvious credit bubbles in the region; and property prices are not in long term decline," he notes.
China is likely to be least affected by the US and European slow down and will continue to post growth rates of 10%. "Most of the slowdown we envision for China comes from a reduction in net exports as import demand from G3 economies ease and peaking capacity pressures in China lead to stronger imports, which means Chinese exports will slow but Chinese imports accelerate."
In Asian equity strategy, Sakthi Siva says: "For the first time since 2000, Asia will enter the new year facing over valuation both relative to history and relative to the world. We are looking for single digit returns in 2008, with stronger gains in markets perceived to be exporters and negative returns in markets perceived to be domestically driven."
An equally important theme for the region in 2008 is whether the Shanghai bubble is going to start deflating and if it does will the rest of Asia de-couple from the valuation-driven correction in China. "We believe the answer is yes," says Siva.
In addition, with US recession fears receding, UBS believes that a switch from domestic defensives markets, including China and India, to exporters such as Korea and Indonesia would be a strong move.
The materials sector will continue its winning run." First, it is still the cheapest sector on a 48% discount. Secondly, we believe there will be a 44% increase in Asia, ex Japan, infrastructure spending over the next five years; and finally, exposure to further materials consumption by Russia, other EMEA, and ASEAN," explained Siva.
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