INFLATION and asset price bubbles seem to be the theme in Asia for 2011, and Credit Suisse's private banking division expects Asian equities to deliver about 19 per cent aggregate upside in 2011. Its top picks are commodity stocks and real estate plays.
The flight to Asian equities comes from investors' 'search for yield' as US dollar-denominated assets are currently low yielding, resulting from the downward pressure on the US dollar following the Federal Reserve's QE2 exercise.
Inflation will remain the key macroeconomic concern for Asian central banks in 2011, said Joseph Tan, Credit Suisse's Asian chief economist for its private banking division, at a global outlook briefing held yesterday.
As a result, against the 'constructive macro backdrop of 2011, we continue to overweight equities, commodities and real estate and underweight fixed income', said Lars Kalbreier, global head of equities and alternatives research, private banking division.
Mr Tan expects most Asian central banks - with the exception of Malaysia and the Philippines - to raise rates. 'This should further widen the interest rate differentials of Asian currencies over the US dollar and invite more hot money inflows into the region in the next 12 months,' he said.
In particular, China is expected to raise policy rates by a minimum of 75 basis points and possibly up to 125 bps in the next 12 months. Inflation for the world's second largest economy will be about 4.8 per cent in 2011, 'nowhere near the peak of 8.7 per cent in 2008'.
????Fan Cheuk Wan, Credit Suisse's private banking's head of research for Asia- Pacific, says that 'quality commodity stocks' are attractive as inflation hedges as they are exposed to strong domestic demand in the region and the upswing in global commodity prices.
She says upstream producers such as Indofood Agri benefit from the uptick in crude palm oil prices. At the same time, she expects agricultural product prices to soften going into Q1 due to 'expected increase in planting areas'.
Ms Fan doesn't think that 2011 would be a year rocked by runaway inflation like in 2008, which saw a 45 per cent spike in oil price to US$145 per barrel.
Real estate developers in Hong Kong and Singapore are also the best poised to benefit in a low interest rate environment and an asset price inflation in Asia.
Said Ms Fan: 'Hong Kong property stocks are geared on asset price inflation fuelled by the HK$-US$ peg and strong Chinese liquidity inflows.'
Given the weakness of the US dollar, investors should also diversify away from holding US dollar risk and add more Asian currencies, including Singapore dollar, Malaysian ringgit, Korean won and the Chinese yuan.