Asia geared play on global demand

The rapid V-shaped recovery experienced in most of the Asian region in 1999 continued strongly into the first quarter of 2000.

The primary driving force behind this rebound in economic growth has been the exceptionally strong global demand for electronic and related products, for which Asia acts as a cheap and efficient manufacturing base.

Indeed, Asia can be viewed as a geared play on global demand at a time when Japan is finally showing signs of a recovery and growth is picking up in Europe. The risk in this scenario is that the Federal Reserve feels the need to raise US interest rates higher than is currently expected and, in doing so, forces the US economy into a hard landing.

Higher US interest rates in themselves should not be bearish for the Asian economies. The export driven recovery has created substantial current account surpluses in many countries across the region, which in turn will provide protection against the global trend towards rising interest rates.

The one exception to this is the Hong Kong market as a consequence of its currency peg to the dollar. This has already inflicted huge deflationary pressure on the Hong Kong economy with real interest rates rising into double figures and showing little sign of turning down.

This has proved to be extremely painful in an economy historically dependent on the property and banking sectors. However, a bright spot for Hong Kong is the early indication that the Chinese economy may, at last, be showing signs of turning around.

The decision to sign up to some wide-ranging concessions in order to join the WTO is extremely positive, as it should serve to accelerate supply side reforms.

We also maintain a positive view on Taiwan. The move on the part of many multinational electronics firms to focus on marketing and distribution has created outsourcing opportunities for a number of Asian companies, especially Taiwan.

In Korea, President Kim Dae Jung has accelerated the pace of reform in the wake of National Assembly elections.

There is still plenty of work to be done, but we believe that the President has provided ample evidence that suggests he will continue the overhaul of the economy.

This is in stark contrast to Malaysia where there has been limited restructuring, especially at the corporate level. Unfortunately, the driving force behind its successful export sector is not adequately represented on the stock market, as it is dominated by multinationals.

We also remain unenthusiastic about the other smaller South East Asian markets. Thailand is still struggling with a dysfunctional banking system and we view the level of political risk in Indonesia as unacceptable.

Angus Franklin is a fund manager at Baillie Gifford

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