Comment: Asia to lead global growth in 2010
Hugh Young, managing director of Aberdeen Asset Management Asia believes that Asia will lead global growth in 2010, pulling other emerging markets along with it.
Whilst developed countries increasingly suffer the effects of fiscal indebtedness, Asia will continue to decouple as domestic demand grows and reliance on exports is reduced.
That is not to say that if the West experiences a relapse, Asia will not be affected. Regional economies still depend to a degree on demand from the West for their manufactured exports, as well as for inward fixed and portfolio investment. That dependence is best reflected in the import of very loose US monetary policy through fixed exchange rates that are in some way pegged to the dollar.
US-China trade relations have become frayed in the face of protectionism, whilst pressure is growing for the Chinese yuan to be revalued. For countries that do not have capital controls, our expectation is that consumer price inflation will lead to monetary tightening anyway. Should prices rise because of stronger domestic demand (rather than supply-side price changes), such developments will however be positive.
Indeed, Aberdeen believes that increased domestic demand (in Asia) will be able to compensate for weakness in developed economies, and will drive growth over the next decade. In addition, Asia’s previous reliance on exports continues to fall as countries such as China, Taiwan and Korea have become increasingly able to manufacture their own capital goods.
Furthermore, while economic growth across Asia was certainly dented by the collapse in demand from the West, Asia’s banking systems have remained strong, having been rebuilt following the financial crisis of the late 1990s. This has meant that in the face of slack demand from developed countries, governments in the region have been able to boost local demand through domestic bank credit (as well as public spending).
Weakness in the West could also, paradoxically, be positive for Asian economies to the extent that that they have not generally been able to satisfy strong domestic demand and strong external demand simultaneously. There may also be less pressure on commodity prices, for which regional economies compete.
Equity markets, and indeed most asset classes, have been highly correlated in the last two years, with 2009 essentially a reversal of 2008. We see 2010 as the year in which investors begin to differentiate between sectors and countries as the reality sets in that while the world may have avoided a second Great Depression, operating conditions for many companies and industries remain tough.
From a regional portfolio perspective, we continue to prefer the quality of Indian companies over Chinese companies due to their healthy balance sheets and good management. In contrast, while China looks set to lead the way from a top-down perspective, the positive macro environment is not always reflected at the corporate level and we prefer to gain exposure to China via well-established Hong Kong-domiciled companies with exposure to China. We also like Singaporean-based companies due to their prudence of management and regional reach.
From a sector perspective, we remain committed to the domestic growth story of these economies and continue to overweight financials.
In summary, we believe that Asian economies will continue to make good progress in 2010, as domestic demand rather than a reliance on exports supports their growth and position as the leaders of global growth. However, the recent corporate earnings growth of 2009, buoyed by one-off factors such as cost-cutting and inventory restocking, will be hard to repeat unless a more fundamental improvement in profitability occurs.
At the same time, whilst Asian economies continue to decouple, they are not immune to the effects of developed economies’ fiscal indebtedness and the subsequent pressure on governments to withdraw stimulus support, increasing the risk of an economic relapse.
Whilst in absolute terms valuations are no longer cheap, we think the region deserves a higher premium to reflect its fundamental strengths including its low levels of personal, corporate and government debt.
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