Asia Second Quarter Business Sentiment Down from Peak

Business sentiment at Asia's top companies fell in the second quarter, hitting its lowest since the third quarter of 2010 as rising costs and growing doubts over the strength of the global economy weighed, a Reuters survey showed.

The Reuters Asia Corporate Sentiment Index fell to 71 from 80 in the first quarter of 2011, which was the highest level since Reuters began collecting data in June 2009. An index above 50 indicates a positive outlook.

Weak U.S. economic data, a debt crisis in the euro zone and worries about inflation and tighter monetary policy in Asia have clouded the outlook for the global economy, denting sentiment across the board.

" We haven't seen the peak of inflation in Asia yet, although central banks are mostly tightening their policy rates...Input prices are getting more expensive and wages are higher across the region and these should continue to squeeze companies' profitability and margins," said Nuchjarin Ranarode, an economist at Capital Nomura Securities in Bangkok.

" In our base case, Asia's economic growth should soften this year and be better next year, helped by a recovery of Japan and Europe."

The index was compiled from a poll of 100 executives at Asia's top companies between June 2-10 from a range of sectors including autos, financial, technology, resources and property.

The 77 responses showed 48 percent of companies were positive or very positive about the outlook, down from 62 percent in the first quarter.

In the current quarter, four companies were negative while one, a Japanese firm, was very negative about the outlook. This compares with just one firm that provided a negative view in the first quarter.

Sentiment turned more cautious in Australia and Southeast Asia, while corporates in China and India remained the most upbeat in the region.

Sentiment in Japan, where respondents included technology firm Sharp, and financial group Mizuho, was largely resilient despite the ongoing disruption from the March 11 earthquake, tsunami and subsequent nuclear crisis.

In Japan, 15 of 21 companies were neutral on the outlook with four positive and two either negative or very negative. This was little changed from the first quarter survey, which most companies responded to just before the earthquake.

About half of the Japanese firms in the poll said global economic uncertainty was the biggest risk to the outlook, while some cited specific issues in the wake of the disaster, including political instability, delays to reconstruction and power shortages.

" The earthquake was a supply-side shock, rather than a demand-side shock like the financial crisis. So if global demand is firm, they (Japanese companies) should be able to recover quickly," said Mitsushige Akino, Chief Fund Manager at Ichiyoshi Investment Management.

" The consensus among economists is for a v-shaped recovery. For corporations that implies a weak first quarter (April-June), which may stretch out to the second quarter, but a rapid recovery in October-December."

Mitsubishi Motors said on Monday annual operating profit would rise by a better-than-expected 25 percent on a rapid rebound in production and sales after the earthquake.

Across Asia, global economic uncertainty was seen as the biggest risk to the business outlook over the next six months, cited by 27 companies, while rising costs was the main obstacle for 21 companies, with four more citing oil price volatility.

Government policy, regulation and higher interest rates were also cited as concerns by corporates in Singapore, Malaysia, India and Australia.

The global recovery had looked relatively rosy in the early part of 2011, with equity markets and commodity prices climbing steadily, as it appeared the Japanese disaster would only be a minor blip for economic growth.

However, from early May a swathe of weak U.S. data, combined with fears of tighter Chinese monetary policy and the re-emergence of the euro zone debt crisis as Greece struggles with its mountain of debt saw markets swiftly retreat.

With the exception of tsunami-hit Japan and flood-hit Australia, first quarter growth had been relatively solid across Asia, with global growth machine China steaming onward.

A rally in commodity prices early in the year saw the Reuters-Jefferies CRB index hit an 18-month high, helped by a weaker U.S. dollar, before sliding sharply as the growth fears hit world markets.

Prices remain at high levels however, helping lift confidence in the resources sector, with eight of 10 respondents positive or very positive about the outlook, unchanged from the last survey.

Sentiment among technology stocks slipped, with six of 16 positive or very positive about the outlook, compared with eight of 13 in the last survey.

In the financial sector, the bulk of firms remained positive or very positive about the outlook. Sentiment among retailers meanwhile improved compared with the first quarter, with retailers in China especially upbeat, reflecting expectations for increased consumer spending.

China and India, where respondents included insurer Ping An [601318.SS 46.43 -0.65 (-1.38%) ] , miner Coal India, and software exporter Infosys, remained the most optimistic countries in the Asia-Pacific region.

However sentiment slipped in both of the regional power-houses from the very high levels seen in the first quarter, with six out of nine Indian companies positive or very positive about the future, compared with seven of seven in the last survey.

" China's domestic economy continues to grow after a soft patch. But inflation is something of a worry and it might last longer than expected. So, the government may have to be more aggressive in its monetary policy, and that will make growth slow down," said Santitarn Sathirathai, an economist at Credit Suisse in Singapore.

" For India, it is more of a worry. India has faced rising inflation and its central bank so far is behind the curve in raising interest rates. So growth has to be sacrificed if it speeds up to raise rates."

India's economy grew at its slowest annual pace in five quarters in January to March as rising interest rates crimped consumption and investment, suggesting the central bank could temper the pace of further tightening to tackle inflation