Asia capex drought seen lasting through 2010

By Koh Gui Qing and Nathan Layne - Analysis

SYDNEY/TOKYO (Reuters) - An electronics components maker in western Japan was sure its clients wouldn't boost spending any time soon ... so it converted idle factory space and began baking cookies.

The plight of NE Works, which in normal times makes sensors and small LCD panels for auto and electronics firms, underscores how far a slump in demand has hit suppliers across Asia.

And, if fund managers and economists are correct, NE Works may be baking cookies well into next year.

Demand over the next five years will be so weak that the International Monetary Fund expects the world to see a widening negative output gap from now until 2014, which means factories will produce far less than they can, giving firms little incentive to invest more.

The IMF estimates the output gap in advanced economies will hit -5.1 percent in 2009. In Japan, the gap may be -8 percent.

Asian firms are saddled with excess capacity after over-investing before the global economic boom crumpled last year. The most bullish forecasts suggest they won't raise spending to increase output again until next June.

"We're having the worst recession in 60 years so companies are not about to sign a cheque anytime soon, especially since a lot of companies entered the crisis with excess capacity," said Joseph Tan, chief Asian economist at Credit Suisse in Singapore.

Combined spending by companies in Japan, Australia, Hong Kong, South Korea, Singapore, Taiwan, Malaysia and Thailand totalled $1.6 trillion in 2008, economist estimates show, virtually unchanged from 2007.

Thanks to the fast-growing engines of China and India, strong investment by mining giants in Australia and government pump-priming, capital spending will probably hold up better in 2009 than in the United States and Europe, economists say.

That could create opportunities for investors even after the recent run-up in share prices.

One of the big swing factors is China, which does not provide official figures on private spending. Government data puts total fixed investment, which includes both private and public outlays, at $2.5 trillion last year.

On top of that, China's government has promised to spend 4 trillion yuan (355 billion pounds) to shore up the economy, with money set aside for housing, infrastructure and power grids.

That could help boost profits at infrastructure and utility firms such as China Railway Construction Corp, China South Locomotive & Rolling Stock Corp and Shanghai Electric Group.

In India, the government is expected to unveil more stimulus in its budget early next month, potentially benefiting power producer NTPC Ltd and cement maker ACC.

"Investors in Asia should just focus on the domestic names," said Desmond Tjiang, chief investment officer for Asia ex-Japan at Fortis Investments.