Asia shines amid global gloom
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While the world as a whole may be stuck in a "low-growth trap," in Asia there are a number of positive themes that present investors with attractive stock opportunities.
Asia's economic prospects have remained bright amid a cloudy global outlook. How can Australian investors take advantage of the opportunities in our region?
The latest economic reports have painted a picture of weak global trade growth and financial distortions which have the world stuck in a "low-growth trap".
According to the OECD's latest "Interim Economic Outlook" report, the global economy is expected to expand by only 2.9 per cent this year and 3.2 per cent in 2017, both below the long-run average of around 3.75 per cent, with subdued performance in advanced economies only partly offset by improving emerging economies.
The Paris-based international economic organisation sees the United States expanding by just 1.4 per cent this year and 2.1 per cent in 2017, with the Eurozone growing by 1.5 per cent and 1.4 per cent, respectively.
In Asia, however, while the world's third-largest economy of Japan is seen expanding by only 0.6 per cent this year and by 0.7 per cent in 2017, China, the world's second-largest economy, is expected to post growth of 6.5 per cent and 6.2 per cent, respectively.
India is expected to continue its robust growth, rising from 7.4 per cent this year to 7.5 per cent in 2017, with South Asia defying global sluggishness to become the world's fastest-growing region.
In a 27 September report, the Asian Development Bank (ADB) said resilience in developing Asia's major economies of China and India would ensure the region continued to grow steadily, at an expected rate of 5.7 per cent for this year and next.
"Strong growth in [China] and India is helping the region maintain its growth momentum," said Juzhong Zhuang, the ADB's deputy chief economist.
"Still, policymakers need to watch for downside risks including potential capital reversals that could be triggered by monetary policy changes in advanced economies, especially the US."
The ADB raised its growth forecasts for China to 6.6 per cent and 6.4 per cent GDP growth this year and next, due to Beijing's fiscal and monetary stimulus measures.
It sees South Asia growing by 6.9 per cent and 7.3 per cent respectively, led by India, while Southeast Asia is expected to post 4.5 per cent growth this year, helped by strong performances in the Philippines and Thailand.
Robert Mann, head of macro for Nikko Asset Management's Asian equity team, suggests a number of themes for investors seeking opportunities in Asian stocks.
"China has Asia's largest middle class population next to Japan, and their consumption continues to grow strongly in areas such as tourism, car sales and imported food. They are importing more soy beans and not wheat for example, along with buying more sporting goods," he says.
"A survey of China's middle class asked what they would cut back on if they thought their income wasn't going to grow next year, and the answer was luxury items such as jewellery and travel, but not education, cosmetics or property.
"In general, the money is being made by domestic companies or Asian companies that understand marketing in China, as opposed to the old days where foreign brands dominated."
Across Asia, Mann points to the healthcare sector as having strong growth prospects due to the region's demographics, pointing to opportunities in China and South Korea.
He also highlighted technology stocks such as China's big three of Alibaba, Baidu and Tencent.
Looking ahead, he suggests investors avoid current incumbents "who will be attacked and lose market share" and instead target the early movers in a sector.
Emerging themes for the next two decades will include demographics along with energy and renewables, which would see increased demand for electric cars and batteries.
"We're past the period of super strong growth [in China] but we expect reasonably benign growth in Asia over the coming year, with markets looking much cheaper after the underperformance of recent years," Mann says.
"Clearly, though, key risks for Asia are the US election and the Fed raising rates ... although Asia still has lots of room on the fiscal side and a current account surplus, so it should be able to survive shocks better than anywhere else."
Asia also has room on the monetary policy side as rates could be cut in many markets if necessary, Mann says.
In an uncertain global environment, investing in Asia's continued growth appears a safer bet than most, particularly in companies with Morningstar-style economic moat characteristics.
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Anthony Fensom is a Morningstar contributor.
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