Asian business sentiment steady in Q1 as U.S. rate hike fear keeps firms in check

Concern over a U.S. interest rate hike kept sentiment in check at some of Asia's biggest firms, as optimism about the outlook for business over the next six months was near steady in the first quarter, a Thomson Reuters/INSEAD survey showed.

The Thomson Reuters/INSEAD Asian Business Sentiment Index was 71 for the March quarter versus 72 three months earlier. A reading above 50 indicates an overall positive view.

Companies in India were the most upbeat for the fourth straight quarter, logging 97 on hopes that low inflation and aggressive interest rate cuts will boost the domestic economy.

Singapore firms registered the least positive outlook for the third consecutive quarter in anticipation of the first U.S. rate hike in almost a decade, which could happen as early as June. Local banks are likely to match the hike, making mortgages expensive and pulling down demand for property.

"There is significant risk as people may have different interpretations of movements in interest rates in a way that can cause dramatic changes in financial markets," said Antonio Fatas, a Singapore-based economics professor at INSEAD.

China's reading rose to 54 from 50, as businesses became more optimistic about their future amid central bank efforts to moderate the economic slowdown with looser monetary policy, including successive interest rate cuts since late last year.

Optimism slid the most in Australia where firms reported a score of 70 from 85 in the fourth quarter, as falling prices of commodities tempered sentiment in the resource-exporting nation.

The poll, by Thomson Reuters with global business and management school INSEAD, was conducted over the first two weeks of March. Of 111 respondents, 45 percent reported a positive outlook, 51 percent were neutral and 4 percent were negative.

Participating firms included Japanese beverage conglomerate Asahi Group Holdings Ltd, South Korean shipbuilder Hyundai Heavy Industries Co Ltd and Australian building materials maker James Hardie Industries PLC.

RISING RATES, FALLING OIL

Strong U.S. jobs data has fanned expectations of a rate hike in the next few months. Low U.S. rates had prompted investors to flood Asia with cheap, speculative funds that could be pulled out as the rates rise.

In developed economies such as Singapore, where a property boom is fuelling lending, the knock-on effect of a rise in local rates could make repayments expensive.

"The combination of really rapid lending growth and prospect of rising interest rates is quite worrying," said Daniel Martin, senior Asia economist at Capital Economics.

Fear of a U.S. hike is balanced somewhat by relief afforded by a drop in global oil prices, reducing energy costs across the board. Oversupply and limited storage capacity has left the price of U.S. crude at a six-year low.

"The fall in gasoline and energy prices means households have more money to spend, so it's positive for real income," Martin said.

Overall, the survey showed Asian firms consider global economic uncertainty as the biggest threat to their six-month business outlook, followed by rising costs and other risks such as regulatory change and increased competition.

PROPERTY TOPS, FINANCE WEAK

Companies in the property sector were the most positive in the survey with a reading of 88, a one-point increase from the previous poll. Retail and drugs followed with 82 and 81 respectively, from 83 and 70.

Financial institutions, dogged by regulatory uncertainty and a lingering hangover from the global financial crisis, were least positive with a score of 55, though that was an improvement from 50 in the previous two quarters.

A robust economic recovery and low interest rates are boosting business at finance houses in Taiwan such as Yuanta Investment Consulting, said the company's chief economist, Aidan Wang. Yuanta plans to expand this year and anticipates an increase in hiring, Wang told Reuters.

Elsewhere, the picture was more subdued.

"Finance firms anywhere in the world are very weak," said INSEAD's Fatas. "It's a combination of the financial crisis, a lack of confidence, and increased regulation which has made business very complex."