HSI close to pre-crisis strength, says Barclays

Barclays Wealth's Asia strategist Manpreet Gill predicts the Hang Seng Index will reach pre-crisis levels by the end of 2009. Today the Hang Seng is hovering around 19,600, after having risen from a recent low of 11,344 on 9 March. Gill says by the end of the year this level will represent fair value, and by the end of 2010, fair value for the HSI will be 23,000.

Despite the run-ups across Asian equity markets this year, they were so undervalued, and regional growth rates sufficiently strong, to argue that present levels are not 'bear-market rallies' but consolidating at reasonable price levels.

This is thanks to a re-rating of earnings expectations due to improving GDP growth. Although Hong Kong's GDP is expected to shrink as much as 4.6% in 2009, before reviving in 2010, other larger markets are doing well. China and India are on track to record 7.8% and 6.0% annual GDP growth for 2009, respectively. China continues to record greater public consumption and investment, while India sees significant domestic demand.

Gill encourages those who have no significant exposure to Asian markets to add some, and suggests those who already entered the market earlier to consider cashing in and trimming positions back to a modest overweight allocation. As the markets become more fairly valued, the strategist warns investors in general to be more selective in terms of countries, industries, and companies.

The region has been showing positive reactions in early 2009 to the fiscal stimulus packages offered by the regional governments, led by China's package which totals about 28% of GDP. Some fear these simulative government policies could gradually lead to inflation. Gill, however, dismisses these fears, saying inflation expectations, and not inflation itself, are a greater concern in the near term, as investors turn to inflation-linked bonds and commodities in an effort to hedge against the continued increase in inflation expectations.

Gill therefore advocates investors to refrain from buying inflation-linked products and further scale back allocation to global treasuries. In fact, Barclays Wealth doubts inflation will emerge as a problem, and projects the actual global inflation to run at only about 2% in 2010 - a figure on par with 2009 and well within most central bank targets, Gill says.

Asian infrastructure stocks remain a good bet for investors over the long term. Gill notes that in China alone, infrastructure spending forms half of the country's stimulus package. According to the Asian Development Bank, approximately $8.29 trillion will be invested in regional infrastructure over the next 10 years.

Commodities should not be underplayed, adds Gill, since developing Asian economies are more commodity-intensive, particularly in agriculture, as regional demand and consumption grows.

The Indian rupee, Indonesian rupiah and South Korean won will appreciate to or above their fair values, Gill says. His prediction is based on their undervaluation compared to their developed regional peers, as well as the improvement in risk appetite as commodity prices rise and foreign investment flows recover.

Despite Gill's optimistic outlook, the global economy remains on shaky ground. High US unemployment has the potential to slow a recovery. But Barclays Wealth prefers to be optimistic and expects economic indicators will continue to point to improving conditions for Asia.