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Despite concerns about inflation and policy tightening, Asia remains near the sweet spot of the cycle for stocks, currencies, and corporate credit, says the Bank of America Securities-Merrill Lynch.

Driven by China, emerging Asia led the global recovery, and will probably help spearhead the monetary tightening cycle, says the bank. But as the Asian upturn matures, concerns are growing about the sustainability of growth, the return of inflation, and the potential for rate hikes.

In their research report entitlted "Trading the Cycle," economists and analysts at Bank of America Securities-Merrill Lynch expects growth to accelerate over the next two to three quarters, inflation to remain below target levels, and policy to remain supportive for the economy.

Analysts at the bank do not expect the credit slowdown in China to have a major impact on demand, saying that growth should hit double-digits towards the end of the year, and remain there well into 2010. In the rest of Asia, Bank of America expects an average 530bp pickup in growth between 2Q09 and 2Q10, driven by pent-up domestic demand and a recovery in exports.

Bank of America's macro forecasts suggest that several countries (China, Hong Kong, Taiwan, Thailand) are moving to the “overheat” phase of the inflation cycle while others (Korea, Malaysia, the Philippines, Singapore) remain in “recovery”, with strong growth but only modestly rising inflation.

"Ranked by Sharpe ratio, our call on Asian FX – the renminbi in particular – is perhaps the strongest view we can put in front of investors over the next year," says the economists in the report.

According to the economists at the bank, China’s effective peg against the US dollar is one of the biggest macro inconsistencies in the region. "We think macro tightening in China – and Asia more generally – needs to include currency appreciation and more flexible FX regimes," they state.

Meanwhile, over in Singapore, non-oil domestic exports is being closely monitored as the bank expects continued sequential recovery of major products, especially electronic items.

In Hong Kong, employment and job vacancies should increase on the back of the economic recovery, says the bank, but warns that increase in the labor force from fresh graduates during the summer should keep the unemployment rate near the current high level.
 

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