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Asia’s time has come

Asian markets stand at an interesting point after the ravages of 2008, with the much vaunted decoupling theory in tatters. Many commentators suggested the region had shed its long-term reliance on the US, driven by massive growth in countries such as China and India. But after a strong 2007, these markets were significantly down last year, with China off by almost two-thirds over the period.

Overall, Asia proved very liable to global shocks. Across the region, GDP in the fourth quarter fell by around 15 per cent on an annualised rate while exports were down by closer to 50 per cent.

Export-dependent countries such as Singapore are expected to go into recession this year, suffering from a much depleted American consumer.

Against this background, share prices have plunged almost as far as during the Asian financial crisis a decade ago. Funds investing the region have suffered a torrid time, with the average fund down by around 30 per cent over 12 months to the start of February, according to Morningstar figures.

First State features four of the top six funds in the Asia excluding Japan peer group over the period, with its Asia Pacific leaders, Asia Pacific, Asia Pacific sustainability and Greater China offerings. But even the best of these, leaders, lost 18 per cent over the unprecedented 12-month period.

Lead manager Angus Tulloch kept ahead of the pack by moving up the market-capitalisation scale last year and quickly reducing exposure to the more cyclical areas.

Asia’s performance is not substantially worse than other equity markets but such losses are significant for a region thought to be more insulated than in the past. Its banks are also generally much healthier than Western counterparts and have not needed such drastic government intervention. Commentators highlight this superior banking picture and a general lack of corporate and personal debt as key structural factors behind longer-term Asian strength.

As in most countries, Asian governments have also put together fiscal stimulus packages to stave off the worst effects of the credit crunch.

Invesco Perpetual head of Asian equities Stuart Parks predicts growth of 7 per cent and 5 per cent for China and India respectively this year, which remains strong in a global context.

He points out that Asian economies, with the exception of Korea, are not leveraged and high saving levels should support domestic demand.

The banking sector has limited exposure to toxic assets and is generally well capitalised, which should lead to robust lending rates and decent access to capital.

Parks says: “The region’s authorities have been proactive in attempts to ease the effects of the downturn through lower interest rates and fiscal stimulus packages. The most notable of these was the US$580bn spending programme announced in China – equivalent to15 per cent of GDP. It is worth remembering that, for the most part, Asia is structurally sound.”

Many managers feel that recent equity market falls have also removed pockets of overvaluation in the region and left Asia at historically cheap levels.

Robert Lloyd George, founder and CEO of Asian specialist Lloyd George Management, highlights what he calls extraordinary buying opportunities in the area.

“There are no significant structural problems, more labour flexibility, higher productivity and enormous foreign exchange reserves (almost US$2 trillion) that can be deployed to offset the slowdown,” he says. “Chinese banks are in better shape than the international banks, with non-performing loans a mere 2 per cent of assets.”

The share prices of many Asian companies are predicting a 60 per cent fall in 2009 profits but Lloyd George expects around 20 per cent at most.

HSBC economists Frederic Neumann and Robert Prior-Wandesforde also predict a return to positive growth in Asia as the year progresses.

The pair believe the region has been hit by two recessions, domestic and external, rather than just collapsing exports.

Overseas shipments did plunge from October, providing a crippling hit to the region’s vast export machine but they said domestic demand had already started to buckle over summer, with investment and consumption starting to slow rapidly.

“Here, the inflation surge over the first half of 2008 and attendant monetary tightening are mostly to blame,” they add.

Looking ahead, they believe domestic demand should begin to pick up as price pressures abate and interest rates come down.

In tandem with powerful fiscal stimulus, the HSBC economists expect this will cause growth to turn positive as the year progresses.

To put some numbers on this, they predict Asia excluding Japan, in weighted terms, will grow by 5.5 per cent this year, down from 7 per cent in 2008.

Within this, Korea, Taiwan, Singapore, and Hong Kong, will see their economies contract on a full-year basis, with China and India more resilient given their vast internal markets and limited exposure to turbulence elsewhere.

“For almost the entire region, with the exception perhaps of Asia’s two city-states, growth will follow the profile of a deepening slump in the first quarter of 2009 but turn positive from the second or third quarter on,” say Neumann and Prior-Wandesforde.

Aberdeen Asia managing director Hugh Young is another high-profile commentator who believes the recent demand shock will be short term.

He says Asian economies must now focus on the next stage of their development, which will see domestic demand take over from external and the region’s markets truly decouple from the West.

He says: “What we are witnessing is a critical point at which economic dominance shifts rapidly from one global force to another. Asia’s time has come.

“With the region set to emerge from the credit crunch stronger than ever, now is without doubt one of the most attractive times to invest in Asia-Pacific equities I have witnessed in over 25 years.”


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