Can G20 agree on a deal to 'cool' yuan appreciation?
Updated: 2010-10-21 07:05
By Guy Monson(HK Edition)
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With quantitative easing back on the agenda in the US and a lack of appreciation of the Chinese currency, currency tensions are heating up before the November 11-12 G20 meeting.
Although uncertain, a very positive outcome would be an announcement by the G20 that they have agreed to some cooling appreciation of the renminbi along with some appreciation of other Asian currencies. This is a potentially "gradual and controlled rebalancing".
But this rebalancing will require 24-36 months to take effect, with Asia to experience extremely strong international liquidity inflows over the next 12-18 months. Asia will experience "hyper-convergence" as normally slow convergence driven by demographics and the ability to leapfrog technologies is magnified by "a positive interest rate shock" with low interest rates in the US forcing funds to Asia.
It's like pouring rocket fuel on a fire that is already burning strongly. That growth will fuel profits for global brands, which are listed in the West and not Asia. Don't confuse economic disaster with corporate disaster but play the Asia growth miracle through cheap, cash-rich, balance-sheet strong equities in the West.
Near deflationary pressure in the West marks the beginning of inflation in Asia, with increasing wages, food and asset prices. Food constitutes about 35 percent of the Consumer Price Inflation basket in Indonesia and China, and almost 50 percent in India. Singapore alone remains determined to fight inflation.
In the meantime, the economic crisis has meant that Western companies have been able to cut wages and staff, as well as automating and restructuring, thereby increasing profitability. Asia, including Japan, is home to just 7 percent of the world's global brands, with Europe claiming 27 percent and the US 66 percent. With most global brands listed in the West, and companies selling into the Asian growth story earning strong profits, investors should set their sights on global blue-chip equities, which are cheaper than Asian stocks.
The quantitative easing is now boosting equity prices and if the US Democrats lose the Congressional election in November, this could also boost equities. Historically, the best combination for the Dow Jones Industrial Average has been a Democratic president with a Republican congress.
Meanwhile, gold will go higher as a hedge against quantitative easing.
The author is Chairman of the Investment Policy Committee at Sarasin Group, an international financial service provider.
(HK Edition 10/21/2010 page2)