Asia investors put aside trade war fears to bet on reflation

Nichola Saminather

* Asian emerging market stocks up over 11 pct from Dec. 23

low

* Cyclical stocks boosted by inflation expectations, global

growth

* Taiwan, S.Korea which have led equity flows in emerging

Asia

* Indonesia, Philippines hurt most by investment outflows

SINGAPORE, March 7 (Reuters) - The initial reaction of Asian

stock investors to Donald Trump's election victory was clear:

sell, on worries his protectionist trade rhetoric could hurt the

region's export economies.

Long-term investors have since started to trade on Trump's

promises of tax cuts and higher infrastructure spending that

will stimulate U.S. growth and pull the world economy along, or

the reflation play.

Asian emerging stocks have risen more than

11 percent from a Dec. 23 low, above November's pre-Nov. 8

election levels though they have come off their highs on

prospects of an imminent U.S. interest rate hike.

"You can buy cyclical stocks in Asia and benefit from the

reflation trade," said Sat Duhra, an Asia fund manager at

Henderson Global Investors. "You don't have to buy exporters and

be exposed to the vagaries of U.S. policy."

The rally in Asian shares has been led by cyclical sectors,

such as consumer-related companies, which typically thrive in

times of economic strength.

Materials stocks, for example, are up 15

percent from post-election lows, while utilities

have risen less than 9 percent.

DEFLATION TO INFLATION

Investors are more confident governments can boost growth

via fiscal policies and that inflation is picking up after a

long period of highly stimulative global monetary policies.

"What has started to change, which is giving people faith,

is that global growth is starting to spread," said Josh Crabb,

head of Asian equities at Old Mutual Global Investors.

"Asia is still very cheap, and people are buying into

markets like Taiwan and South Korea because they see them as

global growth trades."

Old Mutual's sterling-denominated Asia-Pacific fund, whose

biggest holdings include South Korea's Samsung Electronics

, Hong Kong-based Tencent Holdings and

Taiwan Semiconductor Manufacturing Co, returned 6.2

percent in January, compared with the benchmark's 3.9 percent.

Signs are that manufacturing, consumer demand and inflation

are picking up across Asia. The World Bank has also forecast 2.7

percent global growth this year, from 2.3 percent in 2016.

Taiwan and South Korea - which have led equity flows into

Asian emerging markets this year - could be vulnerable to U.S.

trade protectionism, but Henderson's Duhra said larger firms

such as Samsung and TSMC are "so far up the value chain that

they're not just commoditised tech companies."

With more of such companies and stronger current account

positions, North Asian markets are a better bet than Southeast

Asia, he said.

A more stable Chinese economy has also helped emerging Asia.

"The interaction of the Chinese economy with the rest of the

Asian economies is now extremely close," said Mark Wills, Asia

Pacific managing director of State Street Global Advisors, whose

emerging Asia equity fund returned a net 7.5 percent in dollar

terms in January compared with the benchmark's 5.9 percent.

"Markets are basking in the China growth story and have

discounted, for now, trade war threats."

Still, others are cautious.

Credit Suisse has downgraded Asian stocks to neutral,

warning that despite the region's positives the risk of

protectionism and a stronger dollar remain concerns.

Indonesia, with a widening current account deficit, and the

Philippines, with a worsening trade deficit, have seen the

biggest outflows this year.

Deutsche Bank Wealth Management Asia-Pacific chief

investment officer Tuan Huynh has reduced the region to a small

underweight from neutral, as it has exceeded its 12-month

target, but recommended buying on dips.

(Editing by Jacqueline Wong)