By Eric Burroughs and Kevin Plumberg
HONG KONG, May 14 (Reuters) - Asian producers of everything from LCD TVs to notebooks have suddenly been caught short of inventory and have had to ramp up production, a turnaround that has powered a rally in regional stocks to a seven-month peak.
China's nearly $600 billion of stimulus spending has proved a timely boon to hard-hit Asian factories, particularly those making hi-tech goods, but it may not last unless consumers in major economies start spending more on a sustained basis.
The unexpected drop in U.S. retail sales last month showed how households are still suffering blows from heavy layoffs, falling house prices and banks tightening how much credit they extend to households.
Some analysts believe the 45 percent stock rally since early March has run too far too quickly, and investors may be disappointed at the slow pace of economic recovery that could force manufacturers to cut back on output later in the year.
Below are graphics explaining the inventory restocking trend and how it is taking shape. Click on the URL to see the charts.
For a related analysis, click on [ID:nHKG167204]
SOUTH KOREA SHIPMENTS TURN AROUND
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South Korea is one of the most highly leveraged Asian economies to China's growth. Plunging Korean exports to China slowed at the beginning of 2009 and have been improving ever since.
The Korean inventories-to-shipments ratio, which reached a seven-year high in November 2008 when they scrambled to start slashing inventories, appears to have bottomed in February when restocking began.
South Korea's LG Display <034220.KS> said last month TV panel demand has stayed strong and led to a shortage that will continue until the end of June, adding that it was cautiously hopeful. But world No. 1 LCD panel maker, Samsung Electronics <005930.KS>, said it was premature to expect a near-term recovery in the global economy and consumer demand.
KOREA LEADS WAY, BOOSTS MSCI ASIA EX-JAPAN
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South Korea has thus led the way in the inventory restocking, which has also been seen in the sharp recovery in export growth and industrial production.
On a three-month basis, Korean production surged in April to post the biggest such percentage change since the mid-1980s after having suffered the biggest such contraction since the early 1908s in December.
That sharp bounce back has coincided almost exactly with the turnaround in the benchmark MSCI Asia-Pacific ex-Japan index <.MIAPJ0000PUS>, which has been driven by tech and consumer discretionary shares.
ISM NEW ORDERS AND CHINESE EXPORTS
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While some economists were disappointed in that Chinese exports fell at a slightly faster pace in April compared with March, there are reasons to expect that pace to slow in coming months.
One of the most closely followed leading indicators -- the new orders index from the Institute for Supply Management's monthly U.S. manufacturing survey -- has surprised by snapping back to near the 50 growth/contraction dividing line from the record low hit in December for the 61-year-old survey.
The jump in the ISM new orders is one factor driving the optimism about the global growth accelerating later in the year.
The ISM new orders index also has a very close link with Chinese export growth. When looking at the ISM index's correlation with Chinese export growth, it tends to lead changes in the Chinese data by about four months -- suggesting that Chinese exports should start to look better from May onward.
ALL ABOUT CONSUMER SPENDING
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Whether the turn in the inventory cycle and rally in stocks have legs depends almost entirely on consumer demand from the United States and other major economies.
The hope is that layoffs will slow and government stimulus will kick in to spur spending. But that remains a big if. So far, on a annual three-month basis, consumer spending is still shrinking in the United States, euro zone and Japan. Wednesday's U.S. retail sales data shows the contraction is still the sharpest on record.
