Whilst Asia cheered the recent round of US quarterly earnings, the better-than-anticipated results generally pointed to a stabilization and not an imminent recovery. Therefore, many economists fear that the "green shoots" we are witnessing may not sustain, or at the very least, take a while before blooming. Hence, they have warned of a W-shaped recovery, whereby 2H 09 data disappoints. How would Asia react?
According to a UBS research, the bad news is Asia (and the emerging markets) would not escape unscathed. Asia is still very dependent on global trends and global risk appetite; if growth momentum in the G3 turns for the worse, Asia would not get the quick export-led rebound.
On the other hand, UBS believed that the downside for the emerging markets, including Asia, has been sharply reduced when compared to end 2008 or early 2009. A W-shaped recovery would not carry the same negative connotation for EM today than say 6 months ago. He cited 3 reasons:
Firstly, global trade volume have fallen more than underlying G3 demand, implying the sharp inventory adjustment is over. Secondly, the financial pullout from emerging markets is already at a very advanced stage, and there is less scope for damage going forward. Thirdly, domestic trends, like the massive infrastucture spending in China has gained importance, supporting their economies.
On hindsight, it is likely that the 1Q 09 lows in asset prices marked the cycle lows. But, given the nature of this global recession, it is equally likely that the rally would be bombarded with less favorable economic data going forward. But will the markets care? This is beyond fundamentals, and would depend on the psychological and emotional state of the markets. In short, don't know...
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