Asia said to be facing ‘real, compelling risks’

Asia may be in the pink of financial health, but it still must guard against “undue optimism” as the region is facing “real and compelling risks” from lingering debt woes in Europe and the United States, according to visiting investment experts from British banking giant HSBC.

Arjuna Mahendran, HSBC managing director and head of investment strategy for Asia, expressed his concern over what he called the “macho” feeling prevailing among Asian governments and corporations.

In a briefing last week, Mahendran, said they should not be complacent as Asia was not immune from the problems of developed economies and would face key risks in the next six months.

“In summary, the global economy is likely to see very slow growth, particularly in the first half,” he said, noting that things could be better in the second half if policymakers were able to address some of the problems.

As for the United States, Mahendran said there was not still not enough traction among US consumers because they appeared to be borrowing less.

Europe, on the other hand, is expected to fall into a recession while its liquidity crisis may turn into a solvency issue.

The HSBC analyst said that EU financial institutions were some of the biggest lenders in Asia—much larger than American and Japanese banks—because their long presence in the region had given them unique capability in evaluating risks of large scale projects, whether it involved oil exploration or other infrastructure ventures.

If EU banks would start cutting back on their lending activities in the region, Mahendran warned that Asia could have a funding shortfall—something banks in the region would not be able to address.

“Asian banks don’t have that length of experience to do that,” he said.

But improving fundamentals in the region are providing a buffer to these risks, Mahendran said. After Indonesia recently earned an investment grade rating, there’s a strong possibility that the Philippines would also be upgraded soon, the analyst said.

The Philippines is rated a notch below investment grade by Fitch, and two rungs below investment grade by both Standard & Poor’s and Moody’s.

The outlook on S&P’s rating is positive, suggesting an upgrade possibility in the next 12 to 24 months.

With large overseas remittances flowing to the country and foreign reserves exceeding the country’s foreign debt, he said things were looking good.

Once the sovereign is upgraded, he said global bond fund managers would increase their allocation, bringing in more investments in fixed income instruments and help fuel a virtuous cycle.

Typically, foreign inflows to bonds are seen as less volatile than equity flows.

At the same time, Mahendran said, Asian sovereigns were now able to borrow at a much cheaper rate compared with the rest of the world.

HSBC expects growth in the United States to remain below 2 percent at least in the first half. Whenever the US gross domestic product falls below 2.5 percent, bonds and equities likewise follow suit, Mahendran said.

Last year, the local stock market outperformed all other markets in the region.

This year, HSBC expects the stock markets in China, Hong Kong, Singapore and Australia perform well after having been battered by the EU turmoil last year.

Benjamin Pedley, HSBC senior director and head of investment strategy for North Asia, listed key investment themes for 2012.

For one, convertible bonds he said would become interesting.

Also, Pedley expects play on emerging market consumption. This means construction and cement issues in countries holding elections like China will be attractive, while stocks in developed markets like the United States that sell in emerging markets will also benefit from the emerging market growth story.

He also sees a revitalization of high-end US manufacturing, while service economy would remain attractive for countries like the Philippines, which has a big role in business process outsourcing.