Mumbai: Asia-Pacific economies will maintain a healthy growth in 2008, but a possible recession in the US may affect the markets in the region, although marginally, said global rating agency Standard & Poor’s in its latest report on Asia-Pacific markets, released on Wednesday.
In the report, Asia-Pacific Markets Outlook 2008, S&P said the region is expected to remain attractive for investment, with borrowers continuing to tap local debt and equity markets in 2008.
Lorraine Tan, vice-president and director of research, equity research for S&P, forecast a 10-15% growth in the Indian stock market by December 2008. According to Tan, valuations in Indian companies are comfortable, compared with other Asia-Pacific economies. Tan said Indian shares are not that overvalued (when compared with those in other countries in the region).
Although markets across the region remain attractive on the strength of local economies, and the increasing sophistication and depth of capital markets here, there is a real near term risk in the equity markets of the region, as the valuations continue to be very high, the report said.
“The Chinese government is also treading warily around concerns over a growing domestic stock market bubble, but the introduction of measures could send prices down sharply,” it added.
Investment decisions in 2008 “may be tempered by the significant market volatility expected to continue in the new year, given the wary sentiment of global investors,” the report also said.
Although the Asia-Pacific region will be hurt by a US slowdown, as it is heavily dependent on exports to the country, “momentum from domestic and intra-regional demand would go some way towards countering any adverse influence”, coming from the US or Europe, it added.
According to the report, in 2005, India’s exports to Asian countries were 32.7% of its total exports, and to the US and the rest of the world, 20.6% and 46.7%, respectively. For the same period, China’s exports to Asia were 46.4% of its total exports, and that to the US and the rest of the world, 21.4% and 32.2%, respectively. The report shows that countries in the Asia-Pacific region exported about 33-76% of their products to Asia, and only about 7-23% was exported to the US in 2005.
Subir Gokarn, chief economist, Standard & Poor’s, Asia-Pacific, forecast a 40% probability of a recession in the US. However, he said, the Asia-Pacific region is resilient enough to sustain the shock, and the average growth momentum of 7% per year is likely to continue in 2008.
“Even though there is some slowdown in the export to the US due to the housing debacle, the domestic demand in the Asia-Pacific economies are credible enough to counter that,” Gokarn added.
S&P expects the US economy to grow by 2% in 2008.
Gokarn said the resistance from the central governments for an appreciating domestic currency would continue in 2008, but anticipated a modest appreciation in the local currencies against the US dollar.
However, he warned that the increasing price of crude would hurt the growth of China and India, the most energy hungry countries in the region. S&P forecast crude oil price of $75 (Rs2,955) a barrel in 2008.
“We don’t expect oil to cross $100 a barrel. However, the latest Opec (Organization of the Petroleum Exporting Countries) meeting will decide the fate of oil prices. The current oil cost has gone out of the natural logic of demand and supply. It is now driven by external factors,” said Tan.
Stating that the US Federal Reserve has cut 75 basis points in interest rates over the past two months, Tan said S&P expects there will be another two rate cuts in the next three months. One basis point is one hunderdth of a percentage point. The Fed rate has come down from 5.25% to 4.5%.