Sentiment, not liquidity, driving asset prices: C Suisse

Source : Business Times – 28 Aug 2009

THE recent sharp rebound in asset prices in Asia is not due to loose monetary conditions or a deluge of foreign capital, a senior economist at Credit Suisse says in a report.

Rather, improving sentiment among investors is likely the main driving force behind the recent run-up in equity and property prices, according to Credit Suisse economist Cem Karacadag.

In a separate report, Citigroup’s Singapore equity strategist Chua Hak Bin says he now believes the Straits Times Index could reach 3,000 points by the end of March next year, buoyed by better economic data in the next few months.

‘This economic recovery will continue to look V-shaped in coming months, as third-quarter gross domestic product and job growth continue to show a definite improvement,’ he says.

In his report, Credit Suisse’s Mr Karacadag refutes the ‘prevailing wisdom’ that the recent rally in equity and property prices is due to too much liquidity caused by central banks trying to keep interest rates low and local currencies cheap to support economic growth.

‘It has become fashionable to argue that Asia’s monetary conditions are too loose and that too much domestic liquidity is creating asset price bubbles,’ he says.

In fact, the monetary policy of central banks throughout Asia is accommodative ‘for good reason – domestic and external demand is still fragile and money and credit growth are still sluggish, with the notable exception of China’.

Also, ‘if central banks were printing money and increasing domestic liquidity, we would see it in reserve money, the part of money supply that central banks directly control’. Instead, reserve money balances in Asia have been stable or slowing in recent months, Mr Karacadag says.

Liquidity – which he defines as the amount of funds available for lending by domestic banks – has been abundant across the region for years, so it is unlikely to be behind the recent surge in asset prices, he says.

Low credit demand and growth may explain the build-up of liquidity in the banking systems of many Asian countries in recent years, Mr Karacadag says. ‘In effect, domestic liquidity was there for the taking, but it was not wanted.’

Sentiment probably had a lot more to do with lifting property prices so quickly in Hong Kong and Singapore than liquidity. ‘Credit – which has been cheap for a while – was a necessary condition, but it wasn’t until sentiment recovered that things moved.’