Asian markets are dividing opinion, with some analysts forecasting a bursting of the liquidity bubble, while others say the region’s export-driven growth will withstand the US slowdown.
The political economy of Asia was a prominent theme in world events in November, as the region’s global influence grew. First came the annual meeting in Hanoi of the Asia-Pacific Economic Co-operation forum. The organisation comprises Asian countries and other nations, including America.
President George W Bush, chastened by the Republicans’ reversal in America’s congressional elections, attended. Apec urged the resumption of global trade liberalisation talks and said it would study the feasibility of a US-proposed, pan-Asia-Pacific free-trade area. The forum served to emphasise the economic power, actual and potential, of the Asian region. For instance, Vietnam, the host country, is one of the fastest-growing economies in the world.
A landmark New Delhi summit between Chinese President Hu Jintao and Indian Prime Minister Manmohan Singh followed soon after the Apec meeting. It was the first trip to India by China’s head of state in nearly a decade. The leaders vowed to improve bilateral ties and pledged to double trade to $40bn (£21bn) a year by 2010. Both countries’ economies are still growing quickly. Moody’s Economy.com forecasts China – a $2trn economy – will post 10.5% growth for 2006 and 9.3% growth in 2007 (see table).
India, whose economy is much smaller, at $730bn, will grow by 8.2% this year and 6.8% next year, according to the consultancy’s forecasts. Both India and China have raised interest rates in a bid to cool their economies for fear of overheating.
But their bourses have roared ahead despite the tightening measures (see graph). The MSCI China index, expressed in dollar terms, was close to being the best-performing major Asian market between January and November this year, rising nearly 60%. India lagged somewhat, but its 45% return was still healthy.
India’s volatile stockmarket has performed well since 2003, rising four-fold. However, some analysts argue it is expensive given that its price/earnings ratio is about 23% and its dividend yield is only a little above 1%.
So will 2007 really deliver high growth and rising stock prices? Most analysts appear to agree with the type of position taken by Helen Kevans, a Moody’s Economy.com expert. She expects the American economic slowdown to affect Asia, which is still export-dependent, but not excessively so. “Asia-Pacific economic growth will begin to moderate early next year, as a slowdown in the US economy translates into significantly lower spending among US consumers,” she says. “Although the region’s export-driven growth is peaking, the anticipated slowing in growth will be modest.”
“Inflationary pressures will ease on the back of further declines in global commodity prices, giving the region’s central banks more room to lower interest rates later this year or early in 2007. This, in turn, will allow the drivers of domestic demand to strengthen, leading to broader-based economic growth. However, some parts of the region, such as India, South Korea and Australia, will see further monetary tightening.”
Diamond Lee, manager of Resolution Asset Management’s Pacific Growth fund, also contends that the expected economic slowdown will not necessarily be sharp. “The outlook for the Asian market continues to be driven by growth expectations and the outlook for interest rates,” he says. “We believe that the cyclical slowdown is more like that seen in 1995 rather than the sharp contraction in growth witnessed in late 2000-1. Korea remains our chief underweight. China is our main overweight, where the focus is on domestic demand plays such as banks, property and retail.”Asia managed economic growth of 7.5-8% in 1995, compared with just 3.5-4% in 2001.
Some analysts are less sanguine. One of the most troubling scenarios envisages a recession in America – triggered by the still-nascent slump in its housing market – that casts a pall over a less liquid global economy.
Diana Choyleva, a Lombard Street Research economist who expects a Sino-US economic slowdown next year, says equities have benefitted from a tide of liquidity, but that “every boom needs a bust”.
Choyleva suggests that China and Japan have pursued polices that have inundated the world with liquidity, helping to bid up asset bubbles that could eventually burst. “China’s chronic overinvestment and Japan’s preoccupation withits public debt position have combined to boost global liquidity… [China] is providing a huge boost to dollar liquidity, spawning bubbles whose correction will come to haunt Beijing,” she says.
Christopher Wong, a Singapore-based fund manager who runs the Marlborough Far East Growth fund with Jeffrey Lum, is on alert for a correction after Asian markets’ extended bull run over the past few years. “We have exercised our diligence to reduce risk at a time when the market is attuned to interpret all news as good news,” he says. “Risk appetite of investors has moved back to the high level last seen at the beginning of the year.”
“Investors have also begun to look for sectors that have lagged behind,” he adds. “An example is the interest-rate-sensitive Hong Kong property counters. Any deviation from the presumption of a ‘perfect’ soft-landing scenario in the US could result in a correction of the markets. The portfolio is positioned to capture this volatility.
“We will maintain a cautious stance until we are comfortable that risk sentiment is back in line with what is likely to be ahead of us in 2007.”