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By Mike Caggeso
Citing the global inflation epidemic as a key threat to growth, JPMorgan Chase & Co. (JPM) made double-digit cuts to its 2008 stock index forecasts for several major Asian economies.
While JPMorgan is still projecting growth for the Asian indices in question, analysts believe the increasingly restrictive political environment will put downward pressure on stocks as the governments attempt to curtail inflation.
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JPMorgan trimmed its target for Hang Seng China Enterprises Index by 16% to 18,500, India's Sensitive Index was reduced by 18% to 22,500, Hong Kong's Hang Seng Index was cut by 10% to 35,000 and the Philippine Stock Exchange Index was slashed by 28% to 3,400, several strategists wrote in a report.
Other Asian countries' indices also saw their targets cut: South Korea's Kospi by 14% to 1,970 and Indonesia's Jakarta Composite Index by 12% to 2,800.
In February JPMorgan cut its target for Singapore's Straits Times Index by 21% to 3,800. And in late March, it reduced its target for Australia's S&P/ASX 200 Index by 16% to 5,900.
"Investors' focus needs to move to increasing policy risk as governments manage a poorer growth-inflation balance," the report said, Bloomberg reported. "The downside risk is that higher inflation reduces domestic demand and investment, as disposable income and profit margins are squeezed."
But its important to remember that even with the lowered expectations, the Asian indices are expected to make strong gains for the year. For example, based on valuations mid-day Friday, China's Hang Seng Enterprises Index stands to gain another 26% by year's end according to JPMorgan's projections. India's Sensitive Index another 28%.
The report said that global inflation reached a nine-year high of 4.1% in the first quarter. And inflation in emerging economies is 3 percentage points above the average target ceiling.
And on Friday, India's government released a fresh round of inflation statistics, saying that inflation rose 7.57% in the week ended April 19 from a year earlier. The new number means that India's inflation accelerated at its fastest pace in more than three years.
Soaring food and commodities are contributing to worldwide inflation, and India has been acting sternly to curb it. The Reserve Bank of India upped its cash reserve ratio to a seven-year high, Bloomberg reported.
Still, the forecasts show two things: how deep inflation is cutting into the global markets, but also how emerging economies can withstand such severe economic conditions and post impressive gains.
Despite the reduced projections, Asian stocks may be soon poised for a turnaround. Global indices have been moving enthusiastically forward in the last few weeks on speculation that the worst of the credit drought is over.
The major culprits that dragged down Asian indices (especially China's) are stock market linkages between the United States and foreign markets – meaning that currency devaluations and slowing foreign economies (such as China's major trading partner, the United States) pinched the profits of some companies – but nowhere near enough to cause a downturn there.
The bottom line is that China is on track for 10% to 12% growth this year – and that's after China's government has taken steps to slow the country's economy down. Other Asian countries such as India, Vietnam and the Philippines are following in near lockstep.
"Investors who abandon China now will live to regret their decision," Money Morning Investment Director Keith Fitz-Gerald said. "China will continue to grow for decades to come. And that's after nearly 30 years of double-digit growth that country has already logged into the history books."
China Profit Plays
With many indices beat down significantly by the Asian bubble burst and global credit crisis, now may be a time for investors to get in while prices are significantly reduced from their 52-week highs.
However, economic underpinnings are still uncertain – both in Asian and U.S. markets. And only the strongest companies are best suited to grow during good times and bad.
A still-weak greenback will make brand-name imports [both products and services] even more popular in China. And rapidly growing consumer income will give China's increasingly image conscious consumers the cash to buy them with.
We've been predicting that these two trends would converge for some time. That's one reason why, all the way back in September, we said that brand-name companies such as MGM Mirage (MGM) were actually high-profit plays on China. And we still feel that way.
So the bottom line is that if controlling risk is key to your overall investment strategy, as you sift through China-oriented investment opportunities, look for companies that generate revenue and profit "because" of China including those that are based in more-highly regulated markets such as the United States and Europe.
Look, too, for companies with a solid dividend yield because the cold hard cash you receive can go a long way towards reducing your downside.
Every investor must have a China strategy these days.
And while choosing to sit on the sidelines is certainly a viable decision, longer term it's probably just not a profitable one.
News and Related Story Links:
- Money Morning:
Don't Let China's Stock Market Slump "Decouple" You From its Massive Profit Potential
- Money Morning:
By Giving up on China, Investors are Giving up on Profits