Fund manager's comment/Ashok Shah
Asia's economies fall into two categories: those that are more closed, such as China and India, and those that are more export-dependent. It is not difficult to see which of the two will produce higher growth in the near future.
While Chinese exports are slowing, along with those elsewhere in Asia, GDP is expected to remain high and the outlook remains optimistic. Domestic interest rates are low and real rates are even lower, affording limited opportunities for savers, who have been investing in equities instead.
Indian GDP is also likely to be high by Asian standards, although the monsoon season will have a limiting effect. The domestic economy, more defensive because of its greater agricultural base, remains strong, with consumption high and investment healthy.
Despite this, the equity market has succumbed to political uncertainty and has been depressed by a short-selling scandal, currently the subject of a regulatory investigation.
In contrast to China, Hong Kong is a play on export trade and greatly needs an upturn in world economic activity. The economy is linked to US interest rates, with further cuts already priced in. This has been a double-edged sword for the property market. Increased availability has depressed prices, although affordability has risen because of lower interest rates.
There is also heavy export dependence among the more technology-intensive markets such as Taiwan which are particularly reliant on the US, Japan and China and, to a lesser extent, the rest of the world. The intensifying slowdown in Europe is adding to the pressure.
Export volumes are sharply lower, although imports have been cut so current account surpluses are just smaller, rather than having fallen into deficit. Economic growth rates are slowing and are likely to be negative in some countries. The key to their recovery will be the speed at which overseas demand recovers.
Additionally, those markets that are oil consumers have been affected in the short term by higher crude prices.
Nonetheless, internal demand remains strong, interest rates are falling and unemployment is not rising, although lay-offs appear inevitable eventually.
The Asean markets of Thailand, Indonesia and the Philippines have their own problems and are under a cloud as non-performing loans remain high and the banking system clean-up continues. The corporate sector remains depressed because firms need new equity to strengthen their balance sheets, while the political climate is uncertain.
Overall, markets are pricing in the bad news of falling orders and prices. When the pendulum swings and order flows return, the latent potential of the markets will be unleashed, although the timing currently remains uncertain.
The only certainty is that the next boom will be driven by a different capital investment cycle.
• Closed economies to deliver strong growth.
• Lower interest rates boost demand.
• Good potential once world trade recovers.
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