US dollar in for long period of correction: Citi

Singapore

THE US dollar will undergo a fairly long period of correction, and this will lift a major headwind for emerging markets, a top analyst said on Thursday.

Ken Peng, investment strategist for global investments in the Asia-Pacific at Citi Private Bank, said that, with long-term US interest rates contained, the US dollar is moderating after a six-year bull run that has greatly hampered international investment returns.

"We're looking for the US dollar to be in the peaking process. This might last in the coming year. We've had a six-year rally in the US dollar; the reversal of that will not be a short-term correction.

"The dollar correction is something we'll be looking forward to in the next three to five years, rather than in the immediate future," he said, in a mid-year review outlook session held at the Ritz Carlton Millenia hotel.

The prospective US dollar correction will lift a major headwind from emerging markets, ameliorating global investors' concerns of unfavourable currency valuations.

Should the dollar become flat, or weaker, it will even prove to be a tailwind for investors, transitioning from a "subtraction from return expectations into an addition".

Another key theme in Asia is the region's growth and resilience, and its strong external accounts. Despite worries about a US and China slowdown, trade is broadly rising, with global growth accelerating moderately without policy stimulus.

For the first time since 2011 - the start of the US dollar rally - annual forecasts for global growths are not falling. Citi Research expects 3 per cent real GDP growth globally this year and the next.

It is expected that earnings will have more upside potential this year, "clocking between 10 to 15 per cent across the region", he said.

In Asia, the external debt situations are well covered by foreign exchange reserves, with most countries experiencing at least 21/2 times foreign-exchange reserves coverage over short-term debt; the exception is Malaysia, which is very dependent on oil price.

Mr Peng, who is based in Hong Kong, also cautioned against the risk of looking at China's high debt burden in isolation, adding that its vast domestic savings should be taken into account.

"China's financial system is definitely able to support consumer sectors that have potential for growth, such as healthcare, insurance and e-commerce. In general, China's risks are very amplified from global investors' perspectives, but I don't think they're really that dire," he said.

Regionally, global investors are relatively "under-positioned", with investors in Korea, China, Taiwan, Hong Kong and Singapore having clear underweights.

Such a consensus potentially provides outside risks if the stability remains, and the changes in the US dollar view start to favour capital flows to the emerging markets.

Another portfolio-impacting element pointed out by Citi Private Bank was the transformation of commerce. With innovation driving corporate profits, there is a trending increase in the IT sector's share of profits concentrated in industry transformers.

Some incipient technologies include robotics and automation, with technological progress continuing to challenge traditional business models while offering growth opportunities in others.

Looking ahead, Steven Wieting, global chief investment strategist at Citi Private Bank, noted the unusually common and typically temporary phenomenon of summer equity market setbacks, in which a persistent pattern of mid-year economic growth disappointments might play a role.

"In the near-term, we look for advantageous summer asset price weakness to add further to international equities," he said.