Asia-Based Companies Report Highest Level of Business Optimism in Two Years

Optimism among Asian companies rose to the highest level in more than two years in the second quarter of 2014, in part due to leadership changes in India and Thailand and a boost to China’s economy.

The latest Thomson Reuters/INSEAD Asia Business Sentiment Index, which compiled data from 124 companies across Asia during the first two weeks of June, rose from 64 in the first quarter of 2014 to 74 in the second quarter. A score of 50 or above indicates an optimistic outlook.

52.42 percent of respondents stated that their business outlook was neutral and 47.58 percent stated that their business outlook was positive, marking the first time in the poll’s history that no companies reported having a negative outlook.

The survey found that although political and regulatory uncertainty, rising costs and global economic worries were still important business concerns, overall corporate sentiment in Q2 was at its highest level since the beginning of 2012. The Philippines and India were the most optimistic countries with scores of 100, followed by Thailand with a score of 91.

“Business confidence has been buoyed by a broad improvement in the global environment, especially some increased optimism with regards to the outcome of Europe, the U.S. looking quite respectable and Japan travelling better than expected,” said Simon Shakesheff, group executive for strategy and stakeholder relations at Stockland Crop Ltd.

Leadership changes gave significant boosts to corporate sentiment in India and Thailand, with the two important economies helping to drive a rise in the index overall. Business sentiment has risen in India as a result of hopesthat the newly elected prime minister, Narendra Modi, will be able to revitalize the economy by adding jobs, bringing down inflation, encouraging investment and boosting consumer demand.

“India is positive because the previous government has done such a poor job that everyone expects it can only improve,” said Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong.

India’s index surged from 65 in Q1 to 100 in Q2. For the first time since Q4 2012 all Indian companies surveyed reported that they had a positive business outlook, with nine of the 10 companies also reporting a rise in new orders and sales last quarter. Six companies reported a rise in employment levels and three companies stated that payment delays from customers have become less frequent.

A military coup in May led to Thailand’s index surging from 41 in Q1 to 91 in Q2, the highest level since the beginning of 2012. 12 out of the 16 Thai companies surveyed said that they saw an increase in new orders and sales in Q2, and the majority reported a positive outlook.The political disarray before the military coup had soured business sentiment and slowed investment into the country, leading to two quarters of negative sentiment in the Thomson Reuters/INSEAD index.

Thailand’s latest consumer confidence index, released at the beginning of June, rose for the first time in 14 months to a reading of 70.7.May’s high score reflected increased optimism about the military junta’s initial steps to revitalize Thailand’s economy, following a contraction in GDP of 2.1 percent between Q4 2013 and Q1 2014.

“The setup of the government is clearer now. At least now we’ve seen a road map from the military about what they’re going to do,” said Rakpong Chaisuparakul, equities strategist at KGI Securities Thailand.

China was a third country whose score jumped considerably in Q2, rising to 67 from 50 in Q1. Corporate sentiment improved, with a third of companies having a positive outlook compared with all companies having a neutral outlook in Q1. Half of respondents reported an increase in new orders and sales.

Despite improvement in the index, a score of 67 is significantly below China’s peak reading of 95 in Q1 2011, reflecting China’s struggle to adapt to slowing growth. However, there are signs that China’s economy is stabilizing, aided by “mini-stimulus” plans announced earlier this month, which included extending large tax breaks to small businesses, accelerating the building of rail lines and improving housing in poor urban districts.

China saw retail sales and industrial output rising by 12.5 percent and 8.8 percent respectively year-on-year in May, and fixed asset investment rising by 17.2 percent year-on-year for the January-May period.

“The slowdown in China that we saw in Q1 has not extended into Q2 and things seem to have stabilized. There’s quite a lot of relief that the government has stepped in to shore up growth and offset some of the weakness that we’ve seen in the property sector,” said Julian Evans-Pritchard, China economist at Capital Economics.

However, it remains to be seen whether the surge in sentiment for these three countries will be sustained into the next quarter. Modi has warned of the “tough decisions” and “bitter medicine” necessary to put the country in good health, although much of his economic policy will remain vague until he presents his first budget at the beginning of July. Moreover, it is likely that Beijing’s “mini-stimulus” package will only create a short-term boost to the economy and Thailand’s political situation remains unstable after the military coup.

The other Southeast Asian countries represented in the index – the Philippines, Singapore and Malaysia – were mostly upbeat and had scores that were largely unchanged from Q1. The Philippines, which had an unchanged maximum reading of 100, was the most optimistic of the ASEAN countries. All 15 companies recorded a positive outlook, almost all enjoyed an increase in new orders and sales, and two-thirds saw higher employment levels.

Singapore’s index also remained unchanged from Q1 at 67, with a third of respondents having a positive outlook and two-thirds having a neutral outlook. Malaysia’s score slipped slightly from 75 in Q1 to 67 this quarter. No Indonesian companies were surveyed.

The index surveyed companies representing a wide range of sectors, including property, shipping, technology, retail and finance.Region-wide, the strongest sectors were resources, which reached a three-year high in the index with a reading of 80, followed by property in second place with 79 and the shipping, food and building sectors which tied for third place with 75. All 11 sectors indicated an optimistic outlook, with scores ranging between 60 and 80.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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