Manulife’s Pedersen: Is there a north-south divide in Asia?

Endre Pedersen Manulife Asset Management

As China’s economy continues to slow, much has been made of its impact on Asia as a whole.

Seasoned observers may well be noticing that this region of 13 investable markets, which are in many ways far more diverse than Europe, can display a north-south divide. Viewed through the lens of generating absolute returns from the region’s fixed income instruments, we believe there is a definitive split.

The north is dominated by China.

It is a bloc of nations with trade-led and export led-economies that are feeling the strain not only from China but also from quantitative easing, thanks to the world’s central banks. In Japan and Korea, the manufacturing industry is struggling with the effects of weaker export markets and the Chinese industrial slowdown.

The south is best represented by the expansion of the Association of South-East Asian Nations (ASEAN).

These economies, especially Malaysia and Indonesia, do not export or trade as much as their northern bedfellows and instead have a much greater domestic focus.

Take Indonesia – rarely a poster child for European investment into Asia. Its new, reformist government attracted few of the many headlines devoted to Modi’s election victory in India but, unlike Modi, president Joko Widodo has embarked on ambitious change.

His government removed fuel subsidies. That means higher prices for Indonesians filling up at the petrol station but it also removes a liability from the state balance sheet, improving its fiscal situation. That’s good news for sovereign investors.

They are also committed to investment in infrastructure. If this sounds a familiar story to jaded British ears then Jokowi, as he is popularly known, has already started building a toll road network on its main island, new high speed rail links linking Jakarta to regional hubs and new ports – essential for the flow of goods and commerce in a nation of over 250m people.

For credit investors these, and other initiatives, have offered attractive opportunities in carefully selected private and state-sponsored construction and infrastructure companies, in property development and in energy. Attractive partly because they are under researched and partly because valuations have failed to reflect fundamentals.

Opportunities in currency investment, one of the three main Alpha drivers alongside credit and interest rates, can also be found in South Asia. The really compelling investments tend to be in high yielding southern currencies. 

There is no hard boundary here. For example, Singapore is one of the more southerly nations in the region but its sluggish GDP growth of around 2 per cent places it firmly in the more China-dependent ‘northern’ camp.

But the point remains: this complex, layered and now divided market can offer investors some remarkable opportunities to obtain the sort of absolute returns that can be particularly valuable in a world of low yields and low returns.