Events in the US have cast a shadow over the Far Eastern financial markets. In particular, Asian inv...
Events in the US have cast a shadow over the Far Eastern financial markets. In particular, Asian investors have had difficulty digesting the effect of rising US interest rates on the region. The perception has been that an economic slowdown in the US will lead to reduced demand for Asian exports, so nervous investors have sold Asian stocks. Compounding this concern has been the severe recent correction on the Nasdaq. This has damaged global investor confidence towards technology stocks and Asian technology stocks have fallen heavily in sympathy.
We think this is no more than a temporary set-back for the region. This is principally because Asia's economic recovery is not in doubt. On the contrary, the region's strong investment fundamentals remain intact, mainly due to significant reforms that have changed the Asian economic landscape since the financial crisis of the late 1990s.
Also, currency pegs to the US dollar have been cut so that, with the exception of Hong Kong, the major Asian economies are no longer directly exposed to US interest rate rises. Meanwhile Asian companies have restructured to improve efficiency and competitiveness.
So the current stock market volatility in Asia can be interpreted as a reaction to worries emanating from the US rather than anything more fundamental.
We still think the investment outlook for Asia is encouraging. The effect of a gradual economic slowdown in the US on Asia will be limited. US companies will still need to invest in new technology and this will continue to benefit Asian suppliers. Only a recession in the US, which we are not predicting, would threaten this scenario. Also, any reduction in demand from US consumers for Asian goods can be redressed. We think this will provide a catalyst for a pick-up in the pace of economic reform and corporate restructuring, which has lapsed of late.
The current economic recovery in Asia is, to a certain extent, self financing. Asian consumer demand is now recovering strongly and this is making companies less dependent on exports. Also, the first shoots of a Japanese recovery are encouraging, as Japan is an ever more important recipient of Asian exports. Also Japanese companies are increasingly outsourcing manufacturing processes and services to lower cost companies in Asia, especially Taiwan, and this is proving to be a growing source of revenue for the Asian corporate sector.
Our portfolios have been adjusted to adopt a more defensive position in the short term as the current volatility of Asian stock markets is likely to continue until US interest rates are seen to peak. In Asia we still favour north-east Asia over south-east Asia, particularly Taiwan in addition to India, and in the long term we remain convinced of the potential for Asian technology companies.
Richard Schmidt is fund manager of Save & Prosper's South East Asia Growth Fund
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