Merrill Lynch analysts have outlined a muted growth outlook for Asia-Pacific economies, warning equity investors that earnings growth will struggle to exceed single digits in 2003.
Nonetheless, Merrill Lynch still expects Asia to remain attractive relative to global peers, forecasting real GDP growth for the region at 5.2% in 2003, against 2.6% in the US. And although the 3.7% growth predicted for Hong Kong is below the regional average, Merrill's view is still more bullish than that held by many other research analysts.
"The growth in exports from mainland China is having a positive effect on trade and related services in Hong Kong," states Spencer White, head of regional equity strategy for the bank. "The South China ports do not have the size, capacity or efficiency to handle the volume of cargo coming out of the PRC, and we see Hong Kong's advantages as a trading hub remaining for at least four to five years. This will have positive effects on employment and from that consumer spending. In addition, growth will also result from further integration between Hong Kong and the Pearl River Delta."
However, White does not believe in the near term that the Hong Kong-US dollar exchange rate peg will be lifted, which many analysts believe has seriously reduced Hong Kong's competitiveness with other Asian economies.
For equity investors, the forecast is not particularly positive and Merrill advises investors to focus on a back-to-basics strategy, adding that in the current environment dividend yield will be more important than ever.
In accordance with that view, the bank recommends investors to be over-weight in stable earnings markets with a strong combination of growth, valuation and superior returns. India, China, Thailand and Korea all fit into this category, along with Australia.
The bank is market weight on HK, Taiwan and Malaysia while the rest of South East Asia is underweight (Singapore, Indonesia & the Philippines).
In terms of sectors, traditional industries such as energy and materials are seen as preferable defensive investments to new industries such as the IT sector.
