With increasing divergence between individual economies, investors need to be aware of the growing n...
With increasing divergence between individual economies, investors need to be aware of the growing north/south divide within Asia.
The North Asian region, comprising Hong Kong, China, Taiwan and Korea cumulatively accounts for 75% of total Asian ex Japan GDP and 70% of Asia ex Japan's total market capitalisation.
North Asia is one of the world's largest suppliers of manufactured goods and houses some of the world's most technologically advanced companies as well as a host of less sophisticated manufacturing enterprises. Increasingly North Asia, because of its technological edge and cheap well educated labour force, is the destination of choice for western companies, seeking to relocate production overseas.
Companies in North Asia are also benefiting from the rapid spread of outsourcing as more and more Western corporates, unable to offset rising costs by increasing prices, look to cut costs by outsourcing non-core functions.
The latest trends in foreign direct investment (FDI) into the Asian ex Japan region underscores the increasing importance of North Asia. Although investment into the region is still some way below pre-Asian crisis levels, it is picking up.
Moreover, North Asia's share of FDI post the Asian crisis has increased significantly at the expense of South East Asia.
South Korea and China have seen particularly rapid growth in FDI momentum. These trends are unlikely to prove short-lived given the spread of corporate restructuring in Korea and the burgeoning reform of many of China's state owned enterprises.
China's imminent accession to the World Trade Organisation and the growing presence of US multinationals on the Chinese mainland such as IBM, Motorola and General Motors, to name but a few, are likely to give added impetus to the reform of Chinese industry.
Year to date, contracted FDI into China has risen 31% and, in August alone, the value of signed contracts rose 84% year-on-year. The gap between the prospects for the more technologically advanced economies of North Asia and the asset-based and export-driven economies of the South has never before been so pronounced.
Rate sensitive markets
One of the reasons why Asian financial markets have been so volatile in the past has been that regional stock markets are extremely interest rate sensitive, as asset expansion has tended to be financed by debt capital from outside the region.
A rise in US interest rates would, therefore, have a head on impact upon Asian economies and stock markets.
However, North Asia is better placed to withstand any external shocks because of the size of the domestic market. China, for example, has a population of around 1.2 billion, Korea 52 million, and Taiwan 20 million.
In 1997 and 1998, for example, as the crisis developed, the Chinese economy proved relatively resilient largely due to the huge level of domestic demand. Currently, Chinese net exports account for only 9% of GDP while, in Malaysia, net exports account for 25%.
Companies providing goods and services to burgeoning domestic markets are also flourishing.
In China, the telecommunications sector has the second largest cellular subscriber base in the world with over 55 million users. Between them, China Mobile and China Unicom add around 2 million new subscribers every month.
If this growth rate continues, China can catch up with the US (100 million subscribers currently) within the next two or three years.
As well as stimulating the development of local manufacturing and other related service businesses, the existence of this large consumer base means that increasingly multinationals will need to have a presence in China.
The exposure of many Asian funds to the more dynamic economies of the North will have risen over the past few years, by dint of the changes to the MSCI AC Asia Pacific ex Japan index.
However, the message for investors is clear; Asia is no longer a homogenous region from an investment viewpoint. Successful investment will increasingly depend upon differentiating between countries and heavily biasing funds towards the specific markets that have the most long-term potential. Funds that adopt a closet index-tracking approach are likely to underperform.
Although the region would not be immune to rising US interest rates nor to a prolonged slowdown in US economic activity, both these scenarios are looking less likely.
Whatever the short-term vicissitudes of Asian stock markets, the region's role as the manufacturing base of choice for the new technologies is unlikely to be usurped, which will in turn underpin employment creation and consumer expenditure.
Indeed, the current setback could provide active investors with a valuable opportunity to reorientate portfolios to the increasingly strong North Asian industrial areas.
Ezra Sun is a fund manager with the Newton Oriental Growth Fund
What made financial headlines over the weekend?
Compared to 6% of 55-64 years olds
Sam Gold and Doug Abbott to take reins
Bionic advice for private clients