Markets Monthly Magazine I June 2013 In this issue Spotlight: Beware the Rotation Equities: US to retain leadership position Fixed Income: Turn more selective within EMD Commodities: Lacklustre outlook Currencies: Constructive on the EUR Risk Warning Statement : Investment involves risks. Past performance is not indicative of future performance. The reportshould is published by ANZ Wealth Asia. All charts andsolely tableson are individually Investors not make an investment decision based this documentsourced. ANZ analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
Spotlight Beware the Rotation The threat of Fed tapering could see investors unwind their carry trades in the emerging markets and shift to the US, given the latter s gradual evolution from safe haven to growth proxy. The resilience of the US economy since the start of the year is in sharp contrast to the slowing growth momentum in China. In fact, the recent market discussion over the timing of Fed tapering is a reflection of the relative outperformance of the US economy and the perception that it can stay the course of moderate economic expansion. This perception stems from robust improvements in consumer confidence and household spending over recent months. In addition, signals from the labour market, including May s total US non-farm payrolls rise of 175,000 in May, have been surprisingly positive. However, manufacturing remains a prime source of weakness and we need to see this sector recover to lift jobs growth. Our economists expect the US Federal Reserve to start slowing its pace of asset purchases in 4Q this year, with the risk of a sooner start if labour market improvement is sustained. Activity indicators in Europe also appear to be stabilising. Euro area industrial production (excluding construction) rose for the third consecutive month in April (0.4% mom) and is now standing 4.5% qoq, above its 1Q13 average. At the same time, euro zone PMIs stabilised in May, a trend we expect to continue in the near-term. We see the eurozone exiting from recession this year, with growth picking up, albeit modestly, in the second half of the year. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. "ANZ analysts" refer to investment professionals within the ANZ Regional Investment Committee, ANZ
2 3 Conversely, China s activity data in May indicated a grind down in growth, leading us to revise down our GDP growth forecasts to 7.6% this year and 7.8% next year, from our previous 7.8% and 8.0%, respectively. Meanwhile, weak domestic demand has given rise to tepid inflation growth of 2.1% yoy, while PPI inflation declined 2.9% yoy. Excessive capacity is clearly weighing on industrial prices. We believe that in the short to medium term, China s transition towards a slower, albeit higher quality, growth trajectory will increase risks for emerging economies, and in particular those that are commodity dependent. Manufacturing PMIs index, 50 = breakeven 60 55 Given these emerging market vulnerabilities, the US appears to be the only major economy likely to grow close to trend. These shifting growth expectations could have important implications for global capital flows. A long period of extremely accommodative US monetary policy has generated significant capital inflows and asset price appreciation in commodity-producing economies and emerging market countries. These countries now face the prospect of Fed tapering just as their own domestic economies are starting to disappoint. Against this backdrop, we believe that emerging market asset prices could weaken amid a lift in US bond yields. While Asia ex Japan remains our preferred region within the emerging markets, there is the additional risk that Asian currencies could soften should we see a reversal in RMB strength. Investors with significant exposure to the emerging markets may want to look for opportunities to pare back their weightings to these regions, while seeking opportunities to enter the more developed markets. 50 45 Euro Area US BRIC 40 2010 2011 2012 2013 Source: The Institute of International Finance, June 2013. Investment Summary We remain positive on the medium term outlook for growth assets given the combination of a relatively benign macroeconomic backdrop and sustained support from central banks. However, the strong gains in equity markets over the last 12 months have caused many markets to become less undervalued than before. Furthermore, comments by a number of Fed officials have heightened the market s anticipation of a winding down of the US quantitative easing program. This uncertainty is likely to lead to increased volatility in the financial markets in the months ahead. For now, we are comfortable with retaining a modest overweight position in equities, favouring the US. While bond yields are likely to move higher over the medium term, we expect any rise to be limited by the still moderate pace of global growth, subdued inflation and elevated near term risks for China. We continue to favour high quality corporate bonds within the fixed income space, and would prefer to keep duration relatively short. Within currencies, the potential shift in asset flows from emerging markets to the core markets suggests that the prospects for developed market currencies such as the EUR and GBP appear brighter than the commodity bloc and Asia. Finally, uncertainty over China s outlook, a strong USD as well as weakening developed market inflation indicators are likely to continue to weigh on commodity prices. Investors will probably want to see a string of better Chinese data over the next quarter before turning more positive. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. ANZ analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
Equities We believe that the US market can retain its leadership position over the medium term as economic growth drivers broaden further. On the other hand, China s softening growth appears to be increasing risks for the emerging markets. US - The US remains our favoured market regionally, and we believe that the market can outperform over the medium term. Notwithstanding short term headwinds confronting the US economy, largely as a result of the fiscal drag, we believe that the drivers for US growth are expanding to cover both household and business expenditure. The ratio of debt to personal disposable income for US households has fallen by more than 15% in the past five years. In addition, the net wealth of the US household sector has increased by nearly $15 trillion since 2010 on the back of equity and housing market recoveries. See chart. The household sector appears therefore to be ready to support the U.S. recovery through housing investment and consumer spending. Businesses may also be compelled to increase their capital spending on the back of rising business confidence. This backdrop is likely to bode well for corporate earnings going forward. Overall, an increasingly resilient US economy is potentially positive for equity sectors that are more leveraged to US consumer and business spending, including US small caps, specialty retail and household durables. US Household Sector: Net Worth USD trillions 70 65 60 55 50 45 40 35 2000 2002 2004 2006 2008 2010 2012 Source:US Flow of Funds, Datastream. May 2013. Europe - We have a neutral outlook on the European equity market, as economic indicators appear to be stabilising. The eurozone s most recent PMI readings surprised on the upside and encouragingly, orders are outpacing inventories, which suggest improving economic activity. At the same time, the pace of austerity is being pared back in favour of modest growth. That said, the market is likely to remain volatile due to political and social factors. Notably, the German elections in September may increasingly dominate investor interest in the months ahead. Meanwhile, rising US bond yields could cause euro area bond yields to rise prematurely, especially those in peripheral eurozone economies. Many euro area banks could also be exposed to price falls on their holdings of domestic government bonds. Japan - We retain our modest underweight stance towards Japanese equities. Prior to May, the Japanese market had priced in significant optimism over Abenomics and the onus is for Abe to announce further structural reforms upon winning the upper house election in July, or risk disappointing markets further. While the weak yen has improved the competitiveness of Japanese exporters, it remains to be seen whether the earnings upgrades we have seen thus far is sustainable. Input costs have risen commensurately, weighing on domestic margins. The outlook for wages, one of the key ingredients for the success of Abenomics, therefore remains uncertain. China s transition to a new growth model raises risks for the emerging markets. We are cautious on the outlook for Latin America and Emerging Europe. While we are neutral on Asia ex Japan, we would prefer to look for opportunities to benefit from improving consumer and business spending in the US. China/Hong Kong The outlook for the Chinese economy remains unexciting, and likely to disappoint investors looking for a strong rebound. Unless unemployment rises significantly, the authorities are likely to continue to be tolerant of a slower growth trajectory. We are currently watching the country s credit growth which, if unrestrained, could present a risk to the economy in the longer term. Notably, trust assets in 1Q13 grew 65% yoy to RMB8.7 trillion, and currently account for 7% of total banking assets, despite the government s efforts to curb the sector. Overall, we are neutral on the market although we do acknowledge that valuations appear inexpensive. In the coming months, a surprise announcement by China s new leaders of farreaching structural reforms could have a positive impact on the market and investor sentiment. India As a net importer, India has enjoyed some reprieve from falling commodity prices. Furthermore, falling Inflation potentially gives the central bank room to cut rates and support growth. Lower gold prices have also helped to narrow India s current account deficit, although this positive impact was partially offset by higher gold purchases. Given the Indian market s underperformance year to date, we had believed that the market could outperform in the near term as the RBI embarks on an easing cycle. That said, the rupee s volatility (see currency section) could hurt investor sentiment as well as delay rate cuts. Nevertheless, structural headwinds are expected to cap the market s rise unless progress on reforms can be seen during the next August to September parliamentary session, before the state polls begin. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. "ANZ ANZ analysts" analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
4 5 Korea About 70% of Korean companies missed expectations in the latest earnings season, with the industrials sector experiencing the steepest earnings disappointment. Korean companies appear to have responded to the weaker yen by lowering prices, to the detriment of margins. That said, much of the bad news may already be priced in. The market is currently trading at around a 2013 PER of 8.6x, below its 5-year historical trading range. There has been some good news on the domestic front, with the government s recent stimulus package and rate cut in May helping to improve sentiment. In particular, there was a notable pick up in housing transactions. That said, we are cognizant that the Korean index is heavily weighted in cyclicals and would need a solid improvement in the global economic outlook for the market to muster a sustainable rally. Taiwan The market is reasonably valued. Going forward, we expect the Taiwanese supply chain to enjoy healthy tech-related revenues from the launch of new tech products. We continue to monitor for signs of a potential pick up in tech-related spending. Notably, industrial production fell in most key industries in April, while the production of electronics parts gained. Export orders for ICT (Information and Communication Technology) products also bucked the trend and grew in April. Singapore The market is not cheap and the earnings outlook appears muted. There were more disappointments than surprises in the recent 1Q13 earnings season. The former included the transportation and commodity supply chain managers. On the other hand, financial, offshore and marine (O&M), and plantation sectors surprised on the upside. Finally, the fundamentals for the Philippines market appear relatively more robust. 1Q GDP grew by 7.8%yoy, bucking the regional trend. Meanwhile, 90% of 1Q company results were in line or beat expectations, with the banks and select consumer-focused firms surprising on the upside. With three cuts to the Special Deposit Account rate in the last four months, we could see more potential inflows to the equity and property market. That said, valuations remain stretched at 21x 2013F PER. Brazil The outlook for Brazil does not seem exciting unless commodity demand returns on the back of a strong global recovery. Weak domestic consumption and external demand weighed on 1Q13 growth. On the other hand, rising inflation is likely to lead the central bank to add to its 75 basis points of rate hikes to date. Against a muted growth outlook, current consensus earnings expectations of 23.4% for 2013 may seem overly aggressive. Finally, despite its underperformance vs the broader MSCI EM index, the market is still trading above its 5-year historical mean. Russia The Russian economy has faltered on the back of lower oil prices. Export and investment growth also appear muted. Meanwhile, inflation quickened to 7.2% in May, preventing the central bank from lowering rates. Putin s government is trying to jump-start the economy and stem capital flight. On a positive note, there has been a proposal to impose a minimum dividend payout of 35% on state-controlled companies, although current market consensus suggests a low probability of passing this proposal. The Russian market is currently trading at 4.8x, slightly below its 5-year historical average of 5.9x. Earnings forecasts are muted, with the market expecting earnings to contract 3% this year. On the macro front, the economy is showing signs of basing, aided by an emerging recovery in the electronics sector. These developments bear monitoring as the Singapore electronics sector is more aligned to demand for business processing machines. This is unlike its Taiwanese and Korean counterparts, which are more dependent on the demand for consumer electronics. ASEAN We maintain that these markets are a crowded trade and susceptible to profit taking. Over in Indonesia, expected hikes in the diesel and gasoline prices are likely to push inflation past the central bank s target level, raising the likelihood of interest rate hikes. As for Thailand, while contained inflationary pressures provide room for further easing, rising household debt could become a risk. Credit growth in Thailand over the last 12 months averaged 19.2%yoy. Market China Hong Kong India Indonesia Korea Singapore Taiwan Asean Source: ANZ. June 2013. 6-12 month view Slightly positive The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. ANZ analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
Fixed Income Bond yields are likely to move higher, albeit gradually, over the medium to long term. Investors may therefore want to keep duration short while maintaining a quality bias. We continue to favour US and Asian investment grade corporates, but have turned more cautious on Emerging Market Debt. Bond markets sold off in May (see chart), triggered by fears over an earlier than expected end to the Fed s QE program. US Treasuries were the worst hit, with the 10-yr US Treasury bond yield rising 46 basis points over the month. The FOMC has nevertheless reaffirmed its commitment to its open-ended asset purchase program, at least until the outlook for the labour market improves substantially. The Fed has also given itself the flexibility to vary the size of its asset purchases, depending on the economic conditions. As such, our current base case is for Fed tapering to begin from 4Q13, premised on a modest near term softening in the labour market but firming thereafter. Performance of selected bond markets (30 Apr 2013-7 June 2013) 0.0% -1.0% -2.0% -1.7% -1.7% -1.3% -3.0% -2.7% -4.0% -5.0% -6.0% -5.0% Global EM Asian High Global Global US High Bonds Grades Investment Sovereigns Yields Grades Source: ANZ Global Wealth, Asia. Bloomberg. June 2013. Tapering aside, still-weak global growth suggests that global central banks are a long way from hiking rates. That said, bond yields are likely to trend higher over the medium term, and volatility is set to increase, with investors expected to watch the US monthly payroll data closely. Both these factors make the case for shorter duration bond investments. We are assuming however that the Fed will be communicating its exit strategy clearly and well in advance, thereby avoiding a 1994-style bond market selloff. Over in Australia, a deteriorating growth outlook has led our economists to pencil in a 25 basis point rate cut in 4Q13. The economy is growing below trend with 1QGDP growth of 2.5%yoy disappointing market expectations. Current weak domestic demand reflects the soft labour market conditions within Australia. The challenge going forward will be the non-mining sector s ability to absorb the slack arising from much weaker mining investment. While a weaker AUD can help boost some sectors in the economy, further rate cuts may be warranted should the unemployment rate continue to climb. Inflationary pressures are currently subdued, leaving room for more easing if required. Coupled with Australia s AAA rating and real positive yields, the possibility of rate cuts help make Australian sovereigns and semisovereigns relatively attractive, especially for investors who have need to hold AUD. That said, we are cognizant of the sharp rise in foreign bond ownership, from 60% at the end of 2006 to a peak of 76% in June 2012. Stabilisation of this offshore ownership is likely to result in reduced downward pressure on bond yields going forward. New Zealand bond yields also spiked higher in May although global developments were the main source of the volatility. With a stable currency, reduced likelihood of a rate hike and positive real yield, plus the RBNZ s strong focus on fiscal discipline, NZ fixed income can be expected to be a draw for foreign investors. We continue to like high grade US corporate bonds. US corporates profit margins are high, and the extent of leverage, while rising, is still at reasonable levels. A modest pick up in US growth and the rise in Treasury bond yields are likely to keep demand for credit strong and push spreads lower. For longer term investors looking for European bond exposure, we favour European investment grade corporates within European fixed income. There have been signs of stabilisation in the Eurozone recently with better than expected PMI readings in May. The sizeable lift in orders relative to inventory, which historically has been a good guide to future economic activity, is encouraging. Against this backdrop, and with the ECB maintaining an easing bias, we believe that there is room for European IG corporate spreads to tighten over the course of the year. The recent correction in the bond markets suggest that asset classes which have benefited disproportionately from the Fed s largess, and the subsequent global search for yield, are the ones likely to experience the greatest volatility when the Fed s tapering starts. We therefore maintain our cautious stance on global high yields and believe that current yield levels no longer compensate investors adequately for the risks that they are taking. At the same time, we are growing increasingly selective within the Emerging Market Debt segment. The size of the external EM corporate bond market has grown more than three-fold since the financial crisis, aided in part by investors hunger for yield. Meanwhile, fundamentals are deteriorating within selected emerging market economies such as Brazil. Even amid slower economic growth, rising inflation forced the Brazilian central bank to hike rates in April and May. More recently, Standard & Poor s downgraded their Brazil outlook to negative. Within the segment, we would favour Asian investment grade corporates. Inflation pressures in Asia have fallen on the back of lower commodity prices, leaving room for further easing to support growth. Meanwhile, relatively healthier balance sheets and reasonable debt levels will help Asian corporates better navigate the sluggish growth environment. That said, the outlook for Asian currencies appear less constructive (See currency section). The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. "ANZ analysts" refer to investment professionals within the ANZ Regional Investment Committee, ANZ
6 7 Commodities China s uncertain outlook, a strong USD plus weakening inflation indicators in many developed markets all serve to weigh on commodity prices. That said, price declines for base metals may be limited from hereon as producers start to cut back on their output. Price gains in gold will be difficult to hold in the near term as the financial markets price in Fed tapering, potentially resulting in higher Treasury yields and higher USD. There are also signs that physical gold demand from China may start to wane as the premium for Chinese arbitrage activity has reduced significantly in recent weeks (see chart). That said, the drop in gold imports is partly due to slow quota approvals. Only qualified banks that secure quotas from the Chinese central bank can import gold to the mainland. India is also likely to experience a significant decline in import volumes of gold as the market works through the details of the Reserve Bank of India (RBI) import restrictions. In a further move, the RBI raised the import tax on gold to 8%, from an earlier 6%. The authorities appear intent on combating India s current account deficit by targeting gold, and this will continue to act as another headwind for gold prices. Positioning in gold currently appears mixed, with net long futures positioning at a record low but outflows from gold exchange traded products still occurring. We expect to see gold find a bottom at around US$1,320/oz in the near term, and we have revised our year end forecast for gold to US$1350/oz. China s gold imports may start to wane USD 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010 2011 2012 2013 Imports from HK SGE Gold Price (RHS) Source: Bloomberg, CEIC, ANZ Commodity Strategy, June 2013. US$/oz 1,800 1,600 1,400 1,200 1,000 Oil markets are likely to remain choppy in the months ahead, buffeted by mixed data from the US and China. While we anticipate a traditional pick up in demand from the US driving season, growing non-oecd supplies may cap any upside. In terms of positioning, investors appear to be pricing in better seasonal demand from top consumers such as the US and China, but there is risk that they could be disappointed. 800 600 WTI Oil, which is more dependent on the US economy, is likely to continue to outperform Brent Oil, especially if US economic data and seasonal demand remains supportive. On the other hand, demand conditions for Brent remain uninspiring given weak industrial activity in Europe and Asia. On the geopolitical front, rising Saudi Arabian output is likely to help overcome potential squeezes on supply arising from increasing tensions in the Middle East. Base metal prices are likely to continue to experience significant volatility in the months ahead. Prices are unlikely to find support until global inventory levels start to decline. The outlook for Chinese demand, as well as the supply dynamics for copper and aluminium, will be key for prices in the months ahead. Furthermore, inventory levels in China may be a better guide to genuine demand, following the end of local speculative financing deals in the first quarter. On this front, stocks in bonded copper warehouses have fallen by half since the beginning of the year, which suggests that restocking demand could start to rise in the coming months. Prices of nickel and aluminium are all hovering around four-year lows with some producers in these markets no longer profitable. Any cutback in production will therefore help stabilise prices. Notably, greater upside in aluminium is possible now that China s top aluminium producer, Chalco, has cut production. On the other hand, while low nickel prices are pressuring marginal operations, nickel producers are still operating at full capacity. Bulk metals look oversold but face the prospect of fading seasonal demand. Come mid-year, Chinese manufacturing activity tends to dip and de-stocking of bulk inventories starts to kick in. Iron ore and coking coal will need stronger Chinese steel prices before they can find a firmer footing. On this front, the backdrop for Chinese steel demand appears mixed. While automobile output and transport infrastructure investment seems to be picking up, the manufacturing sector remains very weak. In the property market, strong public housing construction is helping to offset weaker private and commercial development. Excess steel capacity remains a challenge in China with the government continuing to prop up loss-making state owned steel producers for social stability and employment reasons. Meanwhile steel stockpiles are only gradually declining from record high levels in April. While iron ore stock piles are relatively low, tight credit conditions and/or banking restrictions are standing in the way of restocking activity. China s proposal to restrict low quality coal imports is a first step towards tackling the country s growing pollution problem. Under the proposed ban, as much as 30% of China s thermal coal imports could be affected. On this front, Indonesian coal producers, the largest exporters of low quality thermal coal to China, are likely to be the most negatively impacted. Higher quality Australian coal exporters could benefit, but we think domestic coal suppliers will be the primary beneficiaries, especially those hurt by more competitively priced coal imports. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. ANZ analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
Currencies The prospect of Fed tapering dominated currency markets in May. Despite this, we believe that going forward, currency trends will reflect the shift in asset flows back to developed markets. As such, any postponement of Fed tapering is likely to benefit the EUR and GBP more than the commodity and Asian currency bloc. USD The Dollar Index gained 2% in May. While the price action has been widely attributed to the threat of a monetary tightening, a broader force appears to be at play. Post the global financial crisis, concerns over a growth collapse in the developed markets and a QE-induced inflation overshoot led investors to focus on emerging market and commodity currencies. With the decline of these tail risks, we believe that diversification flows have peaked and investors are gradually shifting back to developed market assets, especially the US. This is likely to be supportive of the USD, particularly against select currencies. EURUSD and AUDUSD (Dec 2012 - June 2013) 1.38 1.36 1.34 1.32 1.30 1.28 1.26 1.24 1.22 1.20 21 Dec 12 11 Jan 13 1 Feb 13 22 Feb 13 15 Mar 13 5 Apr 13 26 Apr 13 17 May 13 7 Jun 13 AUDUSD (RHS) EURUSD (LHS) Source: ANZ Global Wealth, Asia. Bloomberg. June 2013. GBP We expect the GBP to stay relatively stable for the rest of the year with our year end target for the GBPUSD at 1.50, given a muted growth outlook and the UK s structural current account deficit. That said, BoE governor elect Mark Carney, who is due to start on July 1st, offers the potential for a more proactive policy leadership, especially as inflation is showing signs of receding (April CPI: 2.4% yoy). Recent economic data has also firmed, with stronger than expected May manufacturing PMIs and improvements in the housing market. Going forward, should an environment of global financial uncertainty reoccur, the GBP looks set to benefit from its safe haven status. In fact, if the GBPUSD establishes itself above 1.56, a level of 1.60 can potentially be reached over the short term. That said, Mr Carney s recent speeches suggest that under the correct conditions, he is in favour of radical action that could prove GBP negative. His assessment of the UK economy is therefore key going forward. Current economic indicators are finely poised with PMIs sitting right on the 50 benchmark level. Events in Europe, Britian s largest trading partner, will also be critical. Further degradation of economic activity in Europe could weigh on 1.04 1.00 0.96 0.92 the GBP. However, with the market positioning still overtly bearish GBP, we expect positive surprises to elicit more reaction than negative ones. EUR We are constructive on the euro for many reasons. These include the periphery s improving labour market competitiveness, the region s high and rising current account surplus as well as a moderation in the pace of austerity. Notably, the deficit target of 3% to GDP has been pushed back for France, Italy and Spain. More recent data also suggests that the eurozone is past the worst of its 4Q12/1Q13 economic downturn. Going forward, a stable flow of credit into the fragmented eurozone economies is imperative. Not only would this relieve the pressure on banks to sell their bad assets despite difficult markets, it would also reduce disinflationary pressures. Historically, the euro area has been more dependent than the US on bank finance to boost economic activity. Besides solving its banking crisis, the euro area needs to develop non-bank sources of finance. In this regard, the establishment of an active Asset Backed Securities (ABS) market for SME loans would be positive for growth. Finally, the inability of the eurozone to conduct QE, given the ECB s mandate, is supportive of the euro relative to the other major currencies. We have a year end forecast of 1.37 for the EURUSD, with the potential for the EUR to outperform the AUD, GBP and JPY. JPY Over in Japan, monetary and fiscal policy expansion point to further JPY weakness, leading us to expect the USDJPY to end the year around 105. Japan s upper house elections will take place in July. Should Shinzo Abe win the upper house majority, as widely expected, it will be critical for him to enact further structural reforms. Going forward, we expect JPY volatility to continue, driven by the volatility in Japanese equity and bond markets. AUD We believe that the AUD has peaked cyclically and is likely to return to levels more appropriate for its weaker domestic conditions. While we acknowledge that the AUD will likely continue to benefit from strong foreign interest in Australian property assets and bonds, the currency may be weighed down by a number of other factors (see USD section). As such, we have revised our year end forecast for the AUDUSD to 0.92. In our view, the recent report on Australian companies capital expenditure intentions does not materially change the outlook for the country s monetary policy. Non-mining business investment growth for 2013-14 is likely to be modest, leading us to retain our expectation of one further 25bp rate cut in 4Q this year. Meanwhile, investment by mining companies seems to be holding up this year, but these are mainly large gas projects with a relatively higher import component. Mining investment is expected to fall sharply from mid 2014. Finally, Australia s 1Q GDP printed weaker than expected at +0.6% qoq and +2.5% yoy. This was in part due to weak domestic demand, reflecting the soft labour market conditions, while pricing pressures appeared relatively subdued. The economic picture appears consistent with the RBA s view that the economy is growing at below-trend rates. Nevertheless, the Governor s latest statement suggests that the Bank is likely to be on hold until at least August, after the next inflation reading is released. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. "ANZ analysts" refer to investment professionals within the ANZ Regional Investment Committee, ANZ
8 9 NZD We have recently revised our NZD forecasts and now expect the NZDUSD to hold above 0.80 until 3Q13, and to moderate to 0.79 by year-end. Nevertheless, we still expect the NZD to remain elevated and trade above its fundamental fair value, supported by still attractive New Zealand government bond yields. In addition, New Zealand s growth outlook has improved, and is turning more broad based. Notably, GDP, house prices, confidence and employment indicators have all strengthened. Meanwhile, drought-induced supply shortages have driven NZ commodity prices higher. Against this backdrop and Australia s weakening fundamentals, we see the NZD outperforming the AUD over the next 12-18 months. In recent months, the strong CNY has helped support Asian currencies. However, Asia s vulnerabilities may become increasingly evident as the CNY embarks on a path of greater volatility. Poorer investor sentiment towards the emerging markets is also likely to weigh on the Asian currencies in the months ahead. CNY We may be getting close to the point at which capital flows into China starts to turn. Firstly, foreign equity and bond outflows from China appear to have gathered pace. Secondly, the authorities tighter measures on export invoicing and transhipment, which took effect on June 1st, are likely to help curb speculative fund flows into China. Going forward, we expect the CNY spot rate to trade closer to the daily fixing rather than the lower bound of the CNY trading band, which could widen in the coming months. As such, the volatility of the CNY is likely to rise. Our year end forecast of the USDCNY remains unchanged at 6.15. USDJPY and USDCNY (Dec 2012 - June 2013) 105 100 95 90 85 80 21 Dec 12 11 Jan 13 1 Feb 13 22 Feb 13 15 Mar 13 5 Apr 13 26 Apr 13 17 May 13 7 Jun 13 CNYUSD (RHS) USDJPY (LHS) Source: ANZ Global Wealth, Asia. Bloomberg. June 2013. 6.26 6.22 6.18 6.14 6.10 INR Lacklustre growth, coupled with diminished inflation pressures from lower energy prices and the likelihood of a normal monsoon had set the scene for the Reserve Bank of India to cut the repo rate. However the picture has since been complicated by the falling INR. At the point of writing, the INRUSD has fallen to its lowest ever level, thereby raising fuel import and foreign debt servicing costs and worsening India s current account deficit. For now, it is possible that the RBI may not wish to intensify its current account deficit concerns by easing and further weakening the INR. Therefore we expect the RBI to keep rates unchanged in the near term, although we believe that the central bank remains closer to the beginning than the end of its policy easing cycle. Our year end forecast for the USDINR is 54. IDR We have been cautious on the IDR given the country s need to finance its current account deficit. April s trade data was worse than expected, resulting in a trade deficit of USD1.6bn, the second highest on record. The window for the government to announce the long-awaited fuel price hikes is narrowing as we approach next year s parliamentary and presidential elections in April. In addition, should bond yields rise globally in response to market concerns that the Fed may start moderating its asset purchases, outflows of foreign capital from the Indonesian bond market is likely to worsen Indonesia s current account deficit, further weighing on the IDR. Although official intervention to support the IDR might slow the currency s depreciation in the near term, we note that the country s foreign reserves stand at 12% of GDP, the lowest in the region. Our year end forecast for the USDIDR stands at 9750. SGD The Singapore economy appears to be basing and may be moving into a more durable upswing. May s PMI bucked the regional trend with a strong advance to 51.1, driven by a rebound in the electronics sector. This gels nicely with the better than expected growth in industrial production in April. Meanwhile, inflation slowed to a 38-month low of 1.5%yoy in April. The Monetary Authority of Singapore is likely to continue maintaining a modest appreciation path for the SGD to ensure that inflation does not rebound on the back of recovering growth and a tight labour market. Nevertheless, to reflect our view of a stronger USD, we have revised our USDSGD forecast up slightly to 1.28 from 1.26 at end 2013. TWD We expect the central bank to keep its policy interest rate unchanged for the rest of the year, given the heightened uncertainty in global financial markets. Inflation eased further in April and is expected to remain subdued for an extended period of time. Meanwhile, growth has softened significantly in 1Q13, mainly due to external demand weakness. Our year end target for the USDTWD stands at 30.6. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. ANZ analysts refer to investment professionals within the ANZ Regional Investment Committee, ANZ
Returns Country Equity Markets YTD 1-Yr 3-Yr ASX 200 6.0% 20.9% 11.2% FTSE 100 11.6% 23.7% 26.9% Hang Seng -1.2% 20.2% 13.3% India Sensex 1.7% 21.8% 16.6% Jakarta Comp 17.4% 32.2% 81.2% Korea KOSPI 0.2% 8.5% 21.9% Malaysia KLCI 4.8% 11.9% 37.7% Nikkei 225 32.5% 61.2% 41.0% S&P 500 14.3% 24.5% 49.7% Shanghai-A 1.4% -3.0% -11.2% Singapore ST 4.6% 19.4% 20.3% Taiwan Weighted 7.2% 13.1% 11.9% Regional Equity Markets YTD 1-Yr 3-Yr MSCI World 8.1% 23.2% 32.5% MSCI Europe 5.3% 30.7% 28.1% MSCI BRIC -6.1% 9.0% -8.0% MSCI Emerging Market -4.4% 11.3% 8.9% MSC AP ex Japan -1.0% 17.4% 21.3% Fixed Income Yield 1-mth chg YTD chg Aust Govt (10Y) 3.36 27 9 Bunds (10Y) 1.51 29 19 Gilts (10Y) 2.00 31 17 JGB (10Y) 0.86 25 7 NZ Govt (10Y) 3.58 41 7 SG Govt (10Y) 1.81 44 51 US Trsy (2Y) 0.29 9 5 US Trsy (10Y) 2.13 46 37 Currencies Level 1-mth chg YTD chg USD-JPY 100.45-3.1% -15.8% EUR-USD 1.30-1.3% -1.5% AUD-USD 0.96-7.7% -7.9% USD-SGD 1.26-2.7% -3.5% NZD-USD 0.79-7.2% -4.1% GBP-USD 1.52-2.2% -6.5% USD-CAD 1.04-3.0% -4.6% USD-TWD 29.94-1.4% -3.1% USD-IDR 9877.00-1.5% -0.9% USD-INR 56.51-5.0% -2.7% USD-KRW 1129.64-2.6% -6.1% Source: Bloomberg. As of 31 May 2013.. Commodities Level 1-mth chg YTD chg Aluminium 1906 1.9% -8.1% Copper 7309 3.6% -7.8% Gold 1393-5.4% -16.9% Lead 2201 8.6% -5.5% Nickel 14825-3.7% -13.1% WTI Oil 92-1.6% 0.2% Zinc 1927 3.2% -7.4% Forecasts Base Metals (US$/lb) Sep-13 Dec-13 Mar-14 Aluminium 0.90 0.92 0.95 Copper 3.45 3.60 3.70 Nickel 7.50 7.80 8.20 Zinc 0.90 0.93 0.96 Lead 0.95 0.97 1.00 Tin 10.10 10.10 10.20 Precious Metals (US$/oz) Sep-13 Dec-13 Mar-14 Gold 1320 1350 1420 Platinum 1560 1620 1660 Palladium 740 780 800 Silver 22.2 23.2 24.5 Energy (US$/bbl) Sep-13 Dec-13 Mar-14 WTI Nymex 97 100 103 Currencies Sep-13 Dec-13 Mar-14 USD-JPY 105 105 105 EUR-USD 1.34 1.37 1.40 GBP-USD 1.47 1.50 1.53 AUD-USD 0.93 0.92 0.91 NZD-USD 0.80 0.79 0.78 USD-SGD 1.27 1.28 1.28 USD-TWD 30.4 30.6 30.8 USD-IDR 9800 9750 9750 USD-INR 54.5 54.0 53.5 Cross Rates Sep-13 Dec-13 Mar-14 AUDNZD 1.16 1.16 1.17 AUDSGD 1.18 1.18 1.16 NZDSGD 1.02 1.01 1.00 EURSGD 1.70 1.75 1.79 SGDJPY 82.68 82.03 82.03 GBPSGD 1.87 1.92 1.96 AUDIDR 9114 8970 8873 NZDIDR 7840 7703 7605 EURIDR 13132 13358 13650 JPYIDR 93 93 93 GBPIDR 14406 14625 14918 Source: ANZ Economics & Markets Research. As of 12 June 2013. Forecasts are quarterly averages. The report is published by ANZ Wealth Asia. All charts and tables are individually sourced. "ANZ analysts" refer to investment professionals within the ANZ Regional Investment Committee, ANZ
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