Published April 11, 2009

China-fuelled equity may run out of steam

Full brunt of global recession yet to be fully felt on corporate earnings and balance sheets

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(Hong Kong)

ASIAN equity markets are likely to run out of steam after leading a one-month rally in global stocks, with the full brunt of the deep global recession yet to be fully felt on corporate earnings and balance sheets.

The 26 per cent jump has been driven by cyclical plays such as technology and consumer discretionary shares, mainly on hopes that the worst of the global economic recession was over and that China's growth was cranking up again.

But the road to recovery will be long. The global economy could take longer than expected to recover, banking systems may suffer fresh setbacks and credit markets are still strained.

Companies needing to refinance debt also continue to face steep costs in credit markets, even as their cash flow shrinks as consumer demand sputters.

'There are a number of ways it can come a cropper. The risks are innumerable,' said Tim Rocks, Asia equity strategist at Macquarie Securities here.

Analysts recommend looking for companies with relatively robust balance sheets which may outperform their peers once doubts about a global recovery are finally wiped away, likely late this year or in 2010.

Other investors said that they prefer to invest in high-grade bonds in the US or elsewhere rather than Asian equities, thanks to the steep returns available due to a blow-out in credit spreads. Markets more closely hitched to China's economic engine have benefited the most in the recent rally, as investors hope that Beijing's nearly US$600 billion of fiscal stimulus will filter through to regional economies, partly offsetting a collapse in exports to recession-hit Western markets. Chinese stocks have climbed 32 per cent this year. -- Reuters