Australasian Investment Review

Last week it was China confirming solid growth in the third quarter, the week before it was Singapore pointing out that its economy was seeing the same positive forces.

Australia has avoided the crunch, Japan is on the up, and earnings reports later this week will give more shape to that suggestion.

Malaysia has cut taxes as its economy resurfaces, and yesterday the South Korean economy was shown to have expanded in the third quarter at the fastest rate in seven years, thanks to exports and increased investment (helped by government tax breaks and stimulus spending). 

The country's central bank, the Bank of Korea, said the economy grew 2.9% from the second quarter, when it grew by 2.6%.

The economy grew 0.1% in the first quarter of 2009 thanks to heavy Government spending.

That was after a deep 5.1% plunge in the final three months of 2008.

That was the fastest pace since the first quarter of 2002 and compared with estimates from the market of growth of just under 2%.

From a year earlier, GDP was up 0.6%, which was also the growth rate in the June year for the Australian economy. That was the first quarter of year on year growth this year.

The country's stockmarket is up 46% (Australia is up close to 60% and the China by 68%) and the won has risen 5.5% against the US dollar in the past three months as it has become clear the economy has escaped a savage mauling from the recession, unlike Japan.

The unemployment rate fell in September to a nine-month low of 3.4%, consumer and business sentiment have risen and the current account has returned to surplus after a deficit last year for the first time since 1997 (and the last big crisis to hit the country).

Exports grew 5.1% in the third quarter from the previous three months, when they were up 14.7% from the very depressed March quarter.

The fall in exports is slowing, like in Japan and China.

Corporate investment in factories and equipment climbed 9%, compared with a 10.1% rise in the second quarter, thanks to government investment help through its stimulus packages.

Private consumption rose 1.4% from the second quarter; government spending fell 0.8% and construction investment dropped 2.1%.

Australia's Reserve Bank has started lifting interest rates and there are now reports that the Bank of Korea is thinking of following at its next meeting on November 12.

Late last week Malaysia announced income tax cuts for a second straight year in its 2010 budget.

The top personal tax rate will be reduced to 26% in 2010 from 27%.

The country is expected to expand 2% to 3% next year after shrinking by an estimated 3% this year.

"Private sector activity is anticipated to pick up following signs of recovery, enabling the government to consolidate its fiscal position for greater policy flexibility in times of crisis," the Ministry of Finance said in its 2009/2010 economic report.

"Emphasis will be on creating a conducive environment for businesses and entrepreneurship to thrive in a more liberalized environment."

Malaysia will review rules that may be barriers to investment and plans to attract foreign investors to take up stakes in local companies, the finance ministry said.

State-owned companies will be privatized, procedures for registering a business will be expedited and tax relief will be provided for a national broadband project.

Tax incentives for Islamic finance products will be extended until 2015 and more funds will be allocated to promote tourism.

The budget deficit is expected to narrow to 5.6% of gross domestic product next year from a two decade high of 7.4% this year. It was 2.4% of GDP in 2008.

Spending in 2010 is expected to be 191.5 billion ringgit ($US56 billion), down 11.2% from 2009's outlays.

The government says it aims to balance the budget in the next three to six years and the 2011 shortfall will be lower than the one projected for 2010.

Malaysia plans a 5% capital gains tax on property from January to help broaden the tax base and bolster government finances and more importantly a study on the introduction of a goods and services tax is nearing completion.

The government will also review its highly expensive fuel and other subsidies (such as on some foods, like sugar).

The government will also start pushing Malaysians to save more. They will be allowed to use more of their retirement funds for home purchases and personal tax relief for pension contributions and life insurance premiums will be increased. 

Workers will be able to contribute up to 11% of their monthly salary to the state-run Employees Provident Fund, up 8%.

Malaysia, unveiled 67 billion (around $US16 billion) ringgit of stimulus initiatives in two packages over the past year.

And this week should see some firmer idea from Japan on the outlook for the company's stressed corporate sector, especially manufacturers and exporters.

At the same time the Bank of Japan's latest set of economic forecasts will be released Friday and Tokyo economists warn that deflation and lacklustre growth projects is likely to dominate the projections.

We could also get final inflation, retail sales and unemployment estimates as well.

The stronger yen will be a big influence in both, especially the September half year earnings reports and guidance for the rest of the 2010 financial year.

No let up in the strength of the yen is likely.

More than 400 companies will report on Friday alone (the last day of the season). Others are reporting today through Friday.

Strategists have reason for confidence on improved earnings. Macquarie suggests a 7% rise in earnings for the half.

Manufacturers (cars, electronics, industrial plants, tyres, steel, etc) dominate the Japanese stock market.

That makes them sensitive to even small changes in production and sales and there seems to have been an upturn in sales (as shown by the improvement in industrial production in the past six months) and exports.

Car sales have risen because of the impact of tax rebates, China's boom (car shipments rose noticeably to China last month), electronic parts and electronic goods. 

Shipments of flat-panel televisions in Japan were up 32.4% in September on the previous year. Exports of these TVs also rose.

Unemployment fell to 5.5% in September, an unexpected development after rising for much of the previous few months. Retail sales are moribund, deflation is evident at the retail and business level and wages and working hours remain under pressure.

Car makers should lose money, but show an improvement.

Steel will lose money, but reveal hopes for better times in 2010; oil and energy companies are doing it tough because of weak prices and low demand; electronics goods and product companies will be mixed. Sony has hacked into costs as have the likes of NEC, Hitachi and Matsushita.

That should boost results, even if sales are not anything to boast about (a replay of what is happening in the current US reporting season).

Retailers will reveal tough results and outlook: sales in major department stores have been falling for months now.

Some emerging discounters and value brands chains should surprise, however.

Honda and Toyota are two giants to watch. Honda's motorbikes and non auto products have helped it ride out the crash better and Toyota has been exposed badly by the plunge into the wrong vehicles in the US.

Honda may have earned a small net profit, Toyota a loss, but down on forecasts perhaps. Big recalls in the US won't help.

The biggest influence will be the high value of the yen: seeing the Japanese economy is based on exports, they will have to keep shipping as much product into offshore markets as the domestic economy is too weak to absorb unwanted exports.

The yen traded at an average 93.7 to the US dollar during the quarter, stronger than the level assumed by many Japanese companies 

It is now trading around 92 yen and the outlook is for further appreciation with the US dollar expected to fall further.

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