At this point, my dear reader, you may be sick and tired of hearing about the crisis in Egypt. So I will keep my commentary short on Egypt, and rather focus on the good news continuing to emanate out of Asia.
Having spent many years in the Middle East (I lived and worked in the government in Oman), I have a sense of how this crisis came about and what the world can expect.
The problem in Egypt has been festering for more than a decade. Egyptian President Hosni Mubarak was out of touch with the reality and the masses. Excesses of the rich class, corruption, utter poverty and lack of jobs are the norm in Egypt. This was inevitable. What fascinates me is the speed at which this unfolded and the trigger (Tunisia) that led to this watershed event.
In any case, Mubarak is attempting to hang on via his cronies (army buddies) and play shenanigans like not running for the next election, etc. I suspect he will go down the same way as other despots – flee to a haven like Saudi Arabia or London and pass the rest of his life in exile.
When the news on Egypt broke in the U.S. on Friday last week, I stood horrified at the market response. The U.S. dollar strengthened and the stock market fell. It is this dolt mentality of the traders and the herd mentality of the ill-informed investor that makes me cringe. The U.S. dollar is plagued with so many ills that for it to rally is senseless, let alone due to an overdue regime change in Egypt.
Better heads prevailed by Monday to show the real pattern of trading, with markets up due to stronger economic fundamentals and the U.S. dollar getting crushed due to its sorry state.
But Asia remains a beacon of strength and where trade is occurring rather unaffected by such hiccups which doesn’t shift fundamentals, except in Egypt.
Let’s do a quick review:
Taiwan — Fourth-quarter 2010 GDP grew by 6.5 percent, which brings the full-year 2010 GDP growth to 10.5 percent. This is above the global forecast of 10 percent. And with elections later this year, I expect strong growth and a higher stock market in Taiwan all of 2011.
Hong Kong — The unfolding story of the decade, the yuan deposits in Hong Kong, continue to remain very strong. At 5.5 percent of the total deposits, a whopping 101 billion yuan (US$15.4 billion) was added just in December alone. Chinese banks are being allowed in the U.S. to collect deposits now. The Chinese plan on making the yuan is slowly but surely making headway.
South Korea — January exports were up 46 percent month over month. Exports to the developing markets were up three months in a row now. Exports to the EU more than doubled. Japan exports were up 61 percent. China exports were up 35 percent while exports to Brazil, Russia and India (combined) were up 68 percent. Exports to the U.S. were up 35 percent. So with inflation creeping up in Korea and the economy going gangbusters, I foresee a strong stock market with nice gains on the Korean won based on the Central Bank there having to hike rates shortly.
Indonesia — I am beginning to get a bit concerned about the continual pressure of inflation here. The inflation has now crept into food while the core inflation remains stable for now. With 7 percent inflation, it is certainly not the case like India, but it is beginning to worry the growth watchers like me. Growth is strong, but I would be cautious of my investments there in case of a sharp stock-market pullback.
China — There has been a mixed signal from China based on their purchasing managers index (PMI), which slipped from 54 percent to 53 percent. Normally this would indicate a slowdown. But in this case, I argue that the industrial production (IP) data is still very strong and indicates a continual growth pattern. So I would still support a stronger investment in selected areas of the Chinese industry.
India — I will stay a bit longer here. Dalal Street (India’s Wall Street) has taken a significant beating in the past month or so. It has slid a whopping 14 percent in the past six weeks. While this is sobering, it isn’t an alarming trend. India is still a fairly volatile market and one needs a strong stomach and an unflinching belief in its potential to hang on for a ride of your life. The primary cause of the drop is the stubborn and very high inflation rate (14-17 percent on food). This has caused expectation of several interest-rate hikes over the next few months. But the inflation is high enough that it has seriously eroded the purchasing power of the India rupee which is holding back its growth against other currencies.
But at the same time, I do believe that the growth fundamentals have remained unscathed from this plague of inflation. Exports from India are red-hot and growing. Overall exports grew by 22 percent in December as compared to last quarter. On an annual basis, exports are up by 36 percent. With imports being down, the trade deficit has narrowed to $2.6 billion compared to $8.9 billion last month. I still call for a 9 percent GDP growth for 2010-11 here.
Folks, this is what I mean as to the debilitating effects of inflation on stock markets and currency. And to my chagrin, the Federal Reserve wants inflation in this country.
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