GDP growth estimate downgraded from 5.7% to 4.5%

Asian economic growth should still hold up

Our review of macroeconomic trends for the economies under our coverage does not point to the risk of a double-dip. We estimate real GDP for these economies to remain on an upward trajectory.

There are still factors supporting growth in 2H11 and in 2012 though the pace is not as strong as anticipated (1) an end to Japan-induced global supply chain disruptions, and (2) lower oil and commodity prices which will reduce inflation pressures and increase consumer spending.

As central banks in the region have tightened their policy rates to tame inflation, this gives them some flexibility to cut interest rates if the growth outlook worsens. Fiscal options for the region are also more flexible than for other debt-ridden markets.

Singapore
In view of heightened external risks, we scale back our 2011 GDP growth estimate from 5.7% to 4.5% as we downgrade both the goods- and service-producing industries. While some segments such as hospitality may continue to post healthy growth, others such as financial services, transport and storage and wholesale and retail trade may remain weak in 2H11.

Market strategy
Near term favours financials, telcos, REITs and consumer staples. Markets tend to react negatively to growth slowdown; it is no different this time. In our 5 Aug note titled “Fund flows peak amid growth fears” which took the market fallout in Apr-May 2010 as a case in point, we highlighted that financials, REITs, telco and consumer staples should hold up better than commodity stocks. The past week’s fallout has followed a similar pattern.

Again, outperformers tend to fall within the financials, REITs, telco and consumer staple sectors. Some of the Asean-4 stocks that we think should continue to outperform in such choppy market conditions, based on a combination of reasonable valuations, dividend yield and market upside expectations, are Telkom Malaysia, Maybank, DBS, Ascendas Reit, Gudang Garam, DTAC, Thai Union Frozen and AOT.

Meanwhile, we expect commodity stocks to feel the heat until global leading indicators show a more decisive pick-up.

In the medium term, we continue to expect modest real GDP growth for the G3 and stronger outcomes for emerging Asia. We highlight that bear markets do tend to take over when GDP show significant sequential contractions but the latter is not our baseline expectation. We think that the uptrend has probably not ended.

Once the current storm blows over and the protracted slowdown comes to an end, cyclicals should return as outperforming bets.