Citi Outlook for China, Asia: More Central Bank Easing Ahead

Analysts at Citi released their Asia Macro and Strategy Outlook last week. The analysis calls for more central bank easing across much of Asia, beginning with China and permeating to India and Indonesia and potentially South Korea and Thailand as well. The backbone of their dovish outlook was the forecast that Chinese domestic demand will remain slow, according to the report. The main culprit could be that the rate easing inside Asian countries has not "kept up with falling inflation expectations," which then is a drag on demand.

Therefore, even with the recent rate cuts, Chinese central bankers are "still behind the curve." Further accommodation will be "supportive for Chinese equities." Year-to-date, the iShares FTSE/Xinhua China 25 Index FXI, a proxy for Chinese equities, gained 25 percent.

In addition to Chinese equities, Citi said that accommodative policy in China will be supportive of other regional indexes, including Hong Kong, Korea and Taiwan. "A sustained equity rally could provide some positive feedback loop on fundamentals" inside these regional countries, the analysts argued.

This year, those equity markets have also outperformed U.S. markets. The iShares MSCI Hong Kong Index Fund EWH gained 18.4 percent, the iShares MSCI South Korea Index Fund EWY increased 12 percent and iShares MSCI Taiwan Index EWT added 10 percent. The S&P 500, comparatively, has gained just 2.7 percent.

The analysts also said that they recommend a "mild overweight bias" towards Asian emerging market foreign exchange, countries which it said is "immune to Greece risk." Specifically, Citi recommended the Korean Won versus the Japanese Yen, while noting it changed its view to become bearish on Thailand's Baht.