Rocks from Stocks - Macuarie

Currencies: a turning point for policy
Event
Significant changes in currencies create opportunities.
Impact
Asian currencies have depreciated in recent weeks. This is more than just
USD strength; instead it represents a policy change in Asia. Four countries
that tightly control their currencies (China, Taiwan, Malaysia and Singapore)
have decided to support their export sectors by allowing depreciation. This
implies they are less concerned about inflation, and more concerned about
growth. It is less clear whether Korea has made this decision, given the
monetary policy tightening last week.
Currency changes in these countries should be seen as the first line of attack
on the policy front. Other measures of policy easing, including rhetoric, direct
measures, monetary and fiscal policy will inevitably follow as Asian inflation
rates head towards zero over the next few quarters.
Policy support should be a major positive for market sentiment. Growth
outcomes will be a lot better if policy is forthcoming, and we think this broadly
supports a stance towards domestic sectors in Asia such as banks, real
estate and consumer.
We expect the largest depreciations to occur in Singapore, Malaysia and
Taiwan. In China, international political pressure will prevent a significant
depreciation (but a large appreciation is now off the table). Since these are
supported by policy decisions, the depreciations are likely to continue even if
the USD stabilises. Korea probably should allow depreciation but we are
concerned that it will keep policy tight perhaps due to concerns about a likely
blow-out in its current account deficit.
Recommendation
We have identified stocks that have the greatest proportion of USD revenue
and costs as winners and losers from translation gains. Some caution must be
taken here though, because we must bear in mind that the reason the USD is
rising is that non-US growth is declining. Looking at translation effects:
⇒ Translation winners (ie those with high proportion of USD revenue) are
Keppel, Olam, Sembcorp, TSMC, ASE and Powerchip, but for the last
three the growth impact could swamp the translation impact.
⇒ Translation losers (ie those with high proportion of USD costs) are HTC,
Astro. There are a significant number of Koreans also including LG
Chem, SK Energy and Honam Petrochem. an asset allocation perspective, the implied policy shift that thesecurrency movements represent is a reason to be more optimistic on domestic
demand sectors in China, Taiwan, Malaysia and Singapore. We are
overweight banks and property across the region, particularly in China and
Singapore, and see these developments as supporting this stance.