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Asia: back on track or on the brink?

Anthony Fensom  |  04 Sep 2017Text size  Decrease  Increase  |  

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Rising US interest rates, a potential China slowdown, and geopolitical tensions are among the threats to Asia's outlook. However, there are still plenty of opportunities for investors in the world's most economically dynamic region.

 

The Asian Development Bank's (ADB's) latest outlook points to stronger growth for emerging Asia in 2017 on the back of improved export demand. The Philippines-based institution sees the region expanding by 5.9 per cent this year and 5.8 per cent in 2018, helped by a recovering global economy.

South Asia is expected to be the best performer, with India seen expanding its GDP by 7.4 per cent in 2017 and 7.6 per cent next year, due to strong consumption. East Asia is also expected to post a 6 per cent rise in 2017 and 5.7 per cent in 2018, while Southeast Asia is seen expanding by 4.8 per cent and 5 per cent, respectively.

The Economist Intelligence Unit (EIU) also sees Asia and Australasia GDP picking up speed this year, projecting a 4.4 per cent rise compared to the 4.2 per cent growth of 2015 and 2016, aided by an improving external environment.

However, China's continuing dependence on investment-led growth has fuelled a surge in corporate debt, which it estimates at an "unsustainably high" 260 per cent of GDP. EIU research analyst John Marrett expects Beijing to take stronger steps to rectify such issues in 2018, following this autumn's communist party National Congress, at which Chinese President Xi Jinping is expected to consolidate his grip on power.

"The trigger will be the authorities stepping in more firmly to rein in credit and encourage deleveraging, such as tightening monetary policy [and] steps to enhance financial regulatory oversight, such as by restricting debt issuance in certain sectors considered overleveraged," he said.

"The effect will be a hard landing, in that growth will decelerate by the steepest inclement since the global financial crisis, but this will not be uniform across the economy due to the policy-induced effect. Real estate and construction will be hit the hardest; gross fixed investment will take a substantial hit; but private consumption will emerge relatively unscathed, helped by unemployment remaining fairly low."

Commodities exporters such as Australia, Indonesia, and Mongolia are expected to face the fallout most along with Taiwan, while India and Japan suffer less damage due to their more diversified exports.

As a result, the EIU sees China cooling to 4.6 per cent GDP growth in 2018 from 6.8 per cent this year, with Australia slipping to 2.4 per cent next year from 2.6 per cent in 2017. India, however, is seen expanding by 7.3 per cent this year and 7.9 per cent in 2018, with Cambodia and Myanmar also seeing strong growth around 7 per cent.

Other risks to Asia's outlook include an escalation of tensions on the Korean Peninsula, a crisis which thus far has been largely ignored by financial markets, as previously noted by Morningstar.

In addition, the growing divergence between Asian and US monetary policy, with Asia maintaining cheap money while the US Federal Reserve and the European Central Bank (ECB) tighten, has the potential to spark capital outflows from Asia's emerging markets.

Yet analysts expect Asian financial markets to ride out the storm, unlike the "tapering" shock of 2013.

"We think that the yields of 'safe' assets are likely to pick up a little in the next few years, especially in the US where we expect interest rates to rise slightly faster than is currently discounted in markets. However, assuming policymakers continue to tread carefully when it comes to unwinding asset purchases, we expect yields to rise only gradually, and ultimately to remain low by past standards," Capital Economics said in a 24 August report.

Top performer

Robert Mann, senior portfolio manager, Nikko AM, said geopolitical issues and the threat of a US-China trade war had not damaged Asia, with the region the best performer globally in 2017.

"If I worry about anything, the US-China relationship is probably going to get worse than get better due to the US action on intellectual property protection," he said.

"However, when you're buying Asia you're not buying it because it makes cheap goods for the West. The real story is now about consumption in Asia and interregional trade. Recent sales and profits by China's big three tech companies, Alibaba, Baidu and Tencent, are up by 50 per cent year on year, and these aren't impacted by geopolitical issues."

Looking at sectors, Mann pointed to consumption and healthcare in China, with consumption and infrastructure also set to perform well in India. Losers from a threatened China slowdown could include sectors like infrastructure and property, while Australian companies could find it more difficult to compete in China with local operators.

Australian stock investors seeking Asian exposure have access to a range of funds, including the Nikko AM New Asia Fund [13432], which aims to outperform the MSCI All Country Asia ex-Japan index. A range of other funds are also available from managers such as AMP, BT, iShares, Perpetual, and Vanguard, among others.

A number of ASX-listed companies also have a large exposure to Asian growth, including miners such as BHP Billiton (ASX: BHP), biotech CSL (ASX: CSL)--which has seen its China sales double in the past three years--and a2 Milk (ASX: A2M), which has benefitted from China's booming demand for imported infant formula.

With Asia expected to represent 66 per cent of the global middle class by 2030, the growth of Asian consumption is far from finished.

"China and India are a third of the world's population, and if you add in ASEAN it's nearly half. Forecasts say that 40 per cent of global GDP growth through to 2030 is expected to come from China and India, yet they represent only around 6 to 7 per cent of global stock indices," Mann said.

"There's a quote from Warren Buffett that 'time is the friend of the good company and the enemy of the mediocre'. For Asia, time is the friend of countries doing reform and not being complacent, and China and India are both pushing ahead with reforms. On a relative basis, Asia is still cheap compared globally."

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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