Asia-Pacific financial markets will remain generally
strong in 2007, but higher financing costs, increased
corporate borrowing and a frenzy of M&As will fuel
market volatility and add to the risks faced by investors,
says Asia-Pacific Markets Outlook 2007, published
report combines Standard & Poor''s expectations for
equity markets, credit quality, and economic performance
across the region. According to the report, the positive
economic and market conditions that underpinned Asia-Pacific
markets in 2006 will persist in 2007, despite the U.S.
economic slowdown, and this will encourage greater corporate
leverage, deepen the high-yield market and fuel an already
over-heated M&A market.
a result, a slight rise in corporate defaults and more
"fallen angels" (issuers moving from an investment
grade credit rating to high-yield grade) are likely next
year, the report notes. At the same time, a continued
boom in M&A in the region will increase share price
volatility and the credit profile of potential acquirers
and target companies, raising new uncertainties for debt
and equity investors. In 2007, the rise of leveraged buy-outs
and private equity investment in the region will exacerbate
the risks, especially for bondholders.
wheels are still firmly on the Asia-Pacific market juggernaut,
but they will not be spinning quite so dizzily in 2007.
Although the trend is still broadly positive for the year
ahead, there will be some negative credit stories too,"
said Ian Thompson, chief criteria officer for Standard
& Poor''s Ratings Services in Asia Pacific.
Tan, vice president at Standard & Poor''s Equity Research
in Asia Pacific, noted: "After such a spectacular
performance in the second half of 2006, there is less
upside potential for Asian markets in 2007. Corporate
earnings should be supported by strong domestic consumption,
but tighter liquidity will have a dampening effect on
regional stock markets." Standard & Poor''s Equity
Research is recommending over-weighting South Korea, Taiwan,
and China (H-shares) in 2007 and under-weighting Indian
and Japanese equities.
& Poor''s expects economic growth in Asia Pacific to
again exceed most other regions in 2007. This will be
nderpinned by a growth recovery in Japan, continuing momentum
in China and India, and growing intra-regional trade,
which will offset the impact of a slowdown in the U.S.
The potential for a housing "bubble" burst remains,
but property prices should continue to be supported by
pent-up demand and rising middle class incomes.
corporate earnings growth is coming under renewed pressure.
"We believe earnings growth in 2007 and beyond will
feel the pinch from rising input costs, wage growth, a
heavier debt burden, and higher interest rates,"
noted Thompson. Labour constraints in particular loom
as a threat. Wage pressures are expected to build in Asia
because of higher living costs, increased pension and
healthcare costs, skills shortage, rising employment levels,
and slower growth in the labour pool.
expects the region''s financial markets to continue to
broaden and deepen in the year ahead. Rapid development
of both the commercial and residential property markets
will lead to greater issuance of REITs and mortgage-backed
securities, while growth in infrastructure investment
will rely increasingly on financing in the capital markets.
At the same time, the trend toward Asia-Pacific corporate
champions acquiring in overseas markets, including Europe
and the US will accelerate, stimulating both debt and
equity issuance in international capital markets.
are encouraged by regulatory developments that are improving
transparency, strengthening the local financial sector
and spurring foreign investment throughout the region,"
commented Tom Schiller, executive managing director and
head of Standard & Poor''s in Asia Pacific. "We
would like to see governments continue
to support the integration of local markets into the international
capital markets. This process is bringing real and lasting
benefits to local economies, and to international investors."