20 juli 2011
Author: Arthur Kwong, Head of Asia-Pacific Equities BNP Paribas Investment Partners

At a Glance

We see inflation peaking in the second half of the year as commodities prices show signs of stabilizing. We are overweighting emerging markets equities, particularly Asian.

Top country picks include China, India, Indonesia, South Korea, and Thailand. Chinese stock market has one of the lowest valuations in the region. We are underweighting developed markets in the region, such as Singapore, Japan and Australia.Near-term Outlook Upbeat: Inflation Subsiding, Relief RallyInflationary pressure, a major overhang on emerging market equities, shows signs of peaking in June/July. We expect inflation to ease in the second half of the year. Indicators are quite supportive for global emerging markets. Chinese loans, m1 and m2, are falling. In the short-term, commodities prices are showing signs of softening or at least stabilizing thanks to a slight slowdown in global growth, the end of QE2 and profit taking after strong performance. We see oil prices, for instance, stabilizing or even declining a bit to US$105 to US$110 per barrel. A stabilization or decline in commodities is good news for the Asia Pacific region. With inflationary concerns subsiding, emerging market equities are poised to do well. We see a modest relief rally coming, perhaps as soon as the third quarter though concerns about unemployment in the U.S. and European debt continue to loom.

Low valuation is another good reason to take a closer look at emerging market equities. Recent underperformance means the group now has even more of a discount to developed markets than before.Emerging markets are at about a 10% discount to developed equities, but are in a higher growth phase. The economic cycle in emerging markets has also shown resilience, with less volatility. Within emerging markets, we are most positive on Asia. Latin America, by comparison, shows signs of overheating with higher interest rates in Brazil impacting banking and credit.