According to Jan Lambregts, Rabobank’s global head of financial markets research, the world economy is recovering from its biggest post-war slump, however, it will be a sluggish recovery for the year ahead. Interbank lending activity remains thin, while rising delinquency/foreclosure rates are still weighing on valuations of mortgage-based instruments.

Lambregts predicts that US Gross Domestic Product (GDP) will register -2.9% and 1.4% in 2009 and 2010 respectively. On the other hand, GDP growth rates in Eurozone and China in 2009 are projected to be -4.2% and 8% respectively, as well as 0.3% and 8% in 2010 respectively.

Lambregts also foresees that the US inflation rates will rise from -0.5% in 2009 to 2.1% in 2010. As for Eurozone and China, inflation rate for 2009 will be 0.3% and -1.3% respectively, and 0.9% and 2.5% in 2010 respectively.

The worrisome unemployment rate will remain high within US, registering 9.5% and 10.4% in 2009 and 2010 respectively. EUR/USD is unlikely to retrace to Rabobank’s estimate of ‘fair value’ of around US$1.22. Meantime, the likely USD/JPY peak will see the pair enter overvalued territory compared to long term ‘fair value’ levels, which are estimated to be around ¥90.

SQUARE ROOT RECOVERY FOR EQUITY MARKETS
Victoria Mio, Senior Portfolio Manager of Robecco Group (Rabobank’s subsidiary) said that equities in Japan and emerging markets are preferred over Europe and US. Nevertheless, US equity market’s valuation is better compared to interest rates. Positive prospect or US exports due to weak dollar, coupled with aggressive government intervention supports economic recovery. Mio feels that the time is right for investors to invest in US equity market.

According to Mio, domestic investors’ interest will be the driving force to push up the Asia market, although short-term correction is expected to be followed by a rally in 2010. Mio forecasts that Asia will be the most attractive equity region for 2010. She is bullish on China, Taiwan, Thailand and Indonesia equity markets with Japan being a good buy for patient investors.

Dr. Adrian Foster, Robabank’s Asia head of financial markets research added that imports for China should recover more strongly on robust domestic demand. However, net trade contribution will be drag on 2009 GDP growth and it will be neutral for 2010.

Dr. Foster pointed out that confidence was boosted by large government stimulus measures in infrastructure investments, income transfers and fiscal spending incentives. Therefore, he forecasts that job creation would pick up in 2010.

He further argued that he anticipates that USD/CNY will be stable at Rmb6.83 until mid-year 2010 and will hit Rmb6.77 by year-end of 2010.

Dr. Foster briefly touched on the point that although Singapore’s property sector has rebounded with value of residential sales transactions increasing 6-fold since Sep-08, it is still 34% below the Dec-07 peak.