Business sentiment among Asia's top companies slid in the fourth quarter to its lowest in two years, with executives rattled by rising costs and fears over where the global economy is heading.
The Reuters Asia Corporate Sentiment Index fell to 57 in the fourth quarter from 63 in the third quarter, a third consecutive quarterly decline. The poll registered 71 in the second quarter of this year.
While the latest reading indicates a decline in sentiment, an index reading above 50 indicates an overall positive outlook.
The index was compiled between December 5-9 from a poll of 100 senior executives at top Asian companies representing industries from autos and financial to technology, resources and property.
Global economic uncertainty remains the biggest single cloud on the business outlook across Asia, followed by concerns such as weak consumer demand in Australia, government policies and energy supplies in China, regulatory uncertainty in India and a persistently strong yen in Japan.
We're in a limbo and it feels like we're in a recession, but there's enough data to say this isn't true, said Roger Tan, CEO at SIAS Research in Singapore.
This is a terrible situation to be in because we don't know whether to move forwards or backwards.
Tan said Asian economies remain dependent on developments in the United States and Europe, and to some extent China.
Signs in the U.S. and in Europe are not encouraging and companies are cautious of the chain effect they would have on Asia, where many economies are still export-reliant, he said.
Overall, the mood is to hoard as much cash as possible until there's more certainty and we see a clearer situation as to whether economies will go into recession or see a recovery.
Survey in PDF: http://r.reuters.com/vez55s
Graphics: Asia corporate sentiment: http://link.reuters.com/vyf53p
Main risks to outlook: http://link.reuters.com/zuj55s
RACSI vs MSCI Asia-Pac index:http://link.reuters.com/nuj55s
INSIDER: HSBC strategist: http://link.reuters.com/vyt55s
While most companies went from positive to neutral, a surprise was the retail sector, which is turning more positive.
All five retailers polled were neutral-to-positive, a significant improvement from the previous quarter, when about 57 percent were neutral-to-negative. The positive outlooks were mainly from Chinese companies, where rising affluence and urbanization are helping to boost retailers' earnings.
In the finance sector, 10 of 13 banks and insurers polled were neutral, largely in line with the previous quarter. The lack of resolution for the euro zone's sovereign debt crisis has led to volatility in global financial markets, leading banks to cite economic uncertainty as their key risk.
In technology, eight out of 18 responses were neutral, while only four were positive, compared to seven the previous quarter. Five companies polled were negative, compared to three in the third quarter, showing a marked deterioration in their outlook. An overwhelming number of firms were concerned over the global economic uncertainty and its impact on demand.
EUROPE NOT HELPING
I think it's just a lot of uncertainty around the global outlook. It's very easy to paint a bearish picture over the global economy and policymakers are not helping matters in Europe, said Steve Brice, chief investment strategist at Standard Chartered Bank.
If you look at our scenario analysis, we see a 10 percent probability for a strong recovery, 60 percent for a mild recession or muddle environment and 30 percent for a deep recession. That 30 percent is a big number, and is what is going to corporates who are saying: let's wait and see how the policy framework plays out over the next six months before we invest heavily.
Brice said there needs to be clarity on what is happening in Europe before sentiment can improve.
Getting rid of that uncertainty is key, and China is also going to play a very critical role in avoiding a hard landing, Brice said.
We're expecting Chinese growth at 8.1 percent next year, averting a hard landing, but it will feel pretty much like a hard landing in the first quarter, so it's probably going to get worse before it gets better.
CHINA LEADS IN OPTIMISM
Regionally, companies in China, Asia's largest economy, and the world's second-largest, again led the way in optimism, despite concerns the Chinese economy is rapidly losing momentum.
Seven Chinese firms said they were positive about the near future and two said they were very positive. Five of those firms were in tech and retail. This indicates a return to more optimism in China following the third quarter survey when none responded that they were very positive.
I think that worry is greater outside of China than it necessarily is inside, said Patrick Chovanec, associate professor of Tsinghua University's School of Economics and Management in Beijing. Partly that's because outside-of-China has seen more cycles like this.
Talking to people outside China, he said, They've seen ups and downs, whereas people in China have only seen the up; they haven't seen the down.
The outlook in India also improved despite the Indian government reporting last week that the economy would grow between 7.25-7.75 percent in the fiscal year ending in March, lower than had been predicted.
As in the third quarter there were seven respondents, this time with four positive responses, two neutral and one negative, compared with one very positive, five neutral and one negative last quarter.
In Japan, there was only one positive response and five negatives out of 20 companies. That compared with six positive, 19 neutral and only one negative out of 26 Japanese companies in the September survey. Companies participating included Nikon <7731.T>, Toshiba <6502.T>, Daiichi Sankyo Co Ltd <4568.T> and Mitsubishi Corp <8058.T>.
Twelve respondents said economic uncertainty weighs heaviest on them over the next six months, four said currency issues remained a problem because of the strong yen, while others said regulatory changes and consumer sentiment clouded their outlook.
Japan is also particularly worried about China because they realize they're significantly exposed to any kind of downturn. And I think they've seen this movie before, too, Chovanec said.
(Additional reporting by Anuradha Kanwa in Singapore; Writing by Matt Driskill; Editing by Ian Geoghegan)