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Asia-Pacific cities in Tomorrow's World: Do financial conditions support investment appetite?

Asia-Pacific cities in Tomorrow's World

In the third installment of our Asia-Pacific cities series, Harry Tan, Head of Research, Asia-Pacific, touches on the monetary and financial conditions across Asia-Pacific that may impact investment appetite and risk taking.

There has been an increasing focus on the outlook for interest rates across the region, particularly following the series of Fed rate hikes. Necessarily so, as major central banks such as the European Central Bank (ECB) and the Bank of Japan (BOJ) have also started to 'talk' about tapering, following the huge amounts of easing that has taken place since the Global Financial Crisis (GFC) almost 10 years ago. Some of the liquidity that has been injected into the banking system has flowed into production, however, much has flowed into the asset markets, giving rise to concerns over peakish pricing across many asset classes in the search for yield.  

A pullback in quantitative easing and/or interest rate increase is also in the works; central banks will tighten, however, the question is when? In Hong Kong, by virtue of the dollar peg, there is little question that monetary policy will have to follow the Fed in order to maintain the HK$-US$ interest rate differential. In Singapore, the Monetary Authority of Singapore (MAS), which uses the SG$ as a monetary policy tool, is likely to maintain the rate of appreciation of the Singapore dollar nominal effective exchange rate policy band at zero, in order to ensure medium-term price stability. 

The Reserve Bank of Australia is expected to hold the cash rate flat through to the end of 2018 to support consumer sentiment even as business conditions have been expanding at a healthy pace (Fig.1). In Japan, there were concerns over talk of an exit strategy from the BOJ’s Quantitative Easing programme. The latest minutes from the monetary policy meeting in June suggest otherwise: despite surer signs of an improving economic outlook, many members of the BOJ stressed the need to "keep the economy expanding as long as possible", "with the aim of persistently encouraging this virtuous cycle". As such, the current monetary easing stance is likely to persist in the foreseeable future, at 0% to -0.1% for the overnight rate.


Fig.1: Policy rate divergence between US and Australia to persist

Source: Oxford Economics, 2017


That being said, even though growth across many Asia-Pacific economies have improved this year, the nascent pace of recovery, on top of still uncertain global economic and geopolitical risks, suggest that monetary and financial conditions are likely to stay supportive. Any tightening in the long-term would most likely also be measured, with the peak of the current interest rate cycle below historical levels (Fig.2).


Fig.2: Central banks to move cautiously 

 Interest rates (% p.a.)





2019 2020
















2.3 2.6





Hong Kong

0.8 1.0 1.8





0.0 -0.1 0.0 0.0



Source: Oxford Economics, 2017

On balance, capital market sentiment will stay robust and competition for core real estate investments is likely to remain strong in the near term. However, the risk of capital outflow - impacting on interbank liquidity and rates – particularly for open economies, such as Hong Kong and Singapore, bears watching.

We believe investors should stay vigilant on changes in financing conditions, focus on core investments to mitigate price risks (bubble) and keep gearing at very reasonable levels at this point of the cycle.

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