Start of a Singapore rebound or a false alarm?

A so-called marginal macro momentum is sweeping across Singapore and four other countries, says RBS.

What this means is that economic activity is inching closer to normalcy in the island nation, China, Korea, Taiwan and Thailand, at least based on the brokerage firm's assessment of December trade data.

To support its case, RBS also points out the stablizing signs that came with Singapore's GDP contraction estimates.

But there are no guarantees this will result in a full-blown recovery. And should improvements continue unabated, the big winner will be regional risk assets.

Here's more from RBS:

Macro data from the region remains soft. What however, matters for markets is the marginal macro momentum. Marginal momentum is stabilising or even mildly improving. It is early to say whether this improvement will mature into a trend but should that be the case, the race to slash growth forecasts would come to an end. Add to it the improvement in global liquidity and the convergence in sovereign ratings of developed countries with those of Asia – the performance of regional risk assets could be formidable.

After a deep dive in October and November, economic activity is showing signs of stability. We now have December trade data for five countries (China, Korea, Singapore, Taiwan and Thailand). In each country, the sequential momentum improved up even though annual growth rates were uninspiring, in part due to unfavourable base effects. The improvement also tied in with a pick-up in leading indicators such as the semi-conductor equipment book to bill ratio and the import component of the manufacturing ISM in the US. And indeed, exports to the US did improve for all countries barring China.

We also had the advance GDP estimate for Singapore. At -4.9% qoq saar (3.6% yoy), the number was not encouraging at the headline level. The contraction was however, almost singularly driven by the weak manufacturing sector. Singapore’s manufacturing sector tends to be heavily influenced by the volatile pharmaceuticals sector, which in turn has little to do with business cycles. In any case, we expect the final GDP reading to be revised higher. The advance GDP reading, based on data available for the first two months of the quarter did not take into consideration December’s strong export performance. Meanwhile, construction and services activities turned softer but were more indicative of a normalisation from the previous torrid pace.

The point we are getting at is that neither we nor consensus have assumed an improvement in macro momentum for H1 2012. However, should the macro data continue to surprise on the upside, it will define a finish line to the ongoing race to cut growth forecasts and also support risk appetite.

The final point is that a quiet revolution has been taking place in the sphere of sovereign creditworthiness. Owing to both upgrades in Asia and the reverse in the developed world, credit ratings have been on a converging path over the last year or so. We doubt this convergence is being actively figured in investment decisions by non-Asian investors. However, in a risk-on environment, it would augment flows into the region. Within the region, investors including intra-regional investors including central banks and sovereign wealth funds are likely to take cognisance of this convergence in their longer term investment decisions.