Asia is currently the fastest-growing region in the world, and its contribution to global economic growth is expected to remain dominant for years to come. The structural strengths driving economic growth in the longer term are intact but the remarkable market and economic recovery in Asia since the global financial crisis has resulted in pockets of overheating and higher inflation.
Food price inflation and political instability in the Middle East and North Africa, with the rise in oil prices, have amplified inflationary pressures and blurred the market outlook in the short term.
Economic growth in the region remains healthy but, markets may not renew their upward trend until investors believe central bank tightening policies are sufficient and have started to take effect.
The Chinese authorities have been quick to respond to rising prices with monetary policy normalisation and targeted administrative measures on property and bank lending but a fine balancing act is required as the central bank tries to grapple with inflationary pressures without significantly undermining economic growth.
Despite these concerns, which will lead to market volatility in the short term, we remain positive on the market and economic outlook for both Asia and China. China’s growth profile has been impressive in the last decade, delivering around 10 per cent real GDP growth on average.
The drivers of growth in China are undergoing a gradual structural shift away from external demand towards greater levels of domestic demand. China has competitive advantages that will help it maintain the biggest market share of global exports but slower demand from the developed world is likely to see export growth slow from the average 27 per cent annual growth achieved in the last decade.
Consumer demand is unlikely to fully offset this slower export growth, particularly as growth in investment spending should decelerate to more sustainable levels.
However, a lower but more sustainable level of GDP growth can remain relatively high (6-8 per cent) and market returns can be attractive in our view if companies continue to convert this strong growth backdrop into higher profits.
As a market laggard in 2010 and with valuation levels largely pricing in inflation concerns and policy tightening, the outlook for Chinese equities is favourable and we continue to find attractive stock opportunities.
Stuart Parks is head of Asian equities at Invesco Perpetual