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Asia's rat year: pestilence or promise for investors?

Anthony Fensom  |  31 Jan 2020Text size  Decrease  Increase  |  
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Asia’s Year of the Rat has begun inauspiciously, with the coronavirus crisis scaring investors after the early optimism of a US-China trade deal. Will the Chinese zodiac animal live up to its promise of wealth or will it plague investors in 2020?

The new year began on a bright note for Asian markets, after US President Donald Trump announced a “phase one” trade deal with China that eased tensions after a two-year tariff war.

Under the 15 January agreement, the Trump administration scrapped tariff hikes that had been scheduled for late 2019 and pledged to cut tariffs on around US$120 billion ($178 billion) of Chinese imports.

In return, Beijing promised to buy an extra US$200 billion of US imports over two years, including agricultural and manufactured goods and energy.

The eight-chapter agreement also included pledges by China to remove barriers to US financial institutions, along with protecting intellectual property and refraining from competitive currency devaluations, among other issues.

However, the deal left in place 25 per cent US tariffs on some US$250 billion of Chinese imports, which Trump said were subject to a “phase two” deal being reached.

While welcoming the deal, Capital Economics’ Jennifer McKeown said it offered limited upside.

“The deal has done little to move markets since it was largely priced in and it is unlikely to offer a significant boost to global growth either,” McKeown said in a 16 January report.

“The US economy has not been hit hard by the trade war, with consumer prices largely unaffected. China has seen a bigger impact since exports to the US are more important to its economy, but even there some of the damage has been offset by renminbi depreciation.

"And note that any adverse effects on trade so far will not be fully unwound since tariffs are still far higher than they were."

In the Asia-Pacific region, Taiwan, Vietnam, Malaysia, South Korea, Singapore and Australia could suffer should China hike US imports at the expense of other suppliers.

“We suspect that a substantive phase-two deal will never be reached. Decoupling and a gradual reconfiguration of supply chains is likely to continue, damaging long-term growth in China and the rest of emerging Asia,” McKeown added.

In its “World Economic Outlook” report released on 20 January, the International Monetary Fund downgraded its global growth forecasts, citing a slowdown in India, despite upgraded growth for China following the US trade deal.

It predicted global GDP growth would rise from 2.9 per cent in 2019 to 3.3 per cent in 2020, down 0.1 percentage point each year from its previous forecast.

The US, the world’s largest economy, is seen slowing from 2.3 per cent GDP growth last year to 2 per cent in 2020, the year of the presidential election.

China, the world’s second-largest economy, is expected to post a 6 per cent GDP gain this year and 5.8 per cent in 2021, with the “ASEAN-5” of Indonesia, Malaysia, the Philippines, Singapore and Thailand growing by 4.7 per cent in 2020 and 4.8 per cent in 2021.

However, Japan, the world’s third-largest economy, is seen decelerating from 1 per cent GDP growth in 2019 to just 0.7 per cent this year and 0.5 per cent in 2021.

India, which until recently was the fastest growing major economy, is expected to post a 5.8 per cent GDP gain this year and 6.5 per cent in 2021, due to “stress in the nonbank financial sector and weak rural income growth”.

Coronavirus impacts

Yet the forecasts were made before the coronavirus crisis hit the region, sending stocks and bond yields lower, dampening tourism and turning some of China’s biggest cities into virtual ghost towns.

Capital Economics warns a 50 per cent drop in Chinese tourist arrivals could knock up to 3 percentage points off the most vulnerable countries’ GDP, with Hong Kong, Cambodia and Thailand the most vulnerable.

The impact could worsen if it disrupts the industrial sector, particularly if China extends its Chinese New Year holidays and domestic consumption contracts.

According to Gareth Leather, senior Asia economist, “it now looks as though regional growth will slow sharply in the first quarter. Economic growth should rebound if or when the virus is brought under control.”

ANZ Research has estimated that China’s GDP growth could be dragged 0.9 percentage point lower by the coronavirus outbreak, resulting in headline growth of 5 per cent.

Outside China and India, the bank’s economists expect Asia to lose as much as 0.5 percentage points in the first quarter, while Australia could see a 0.2 percentage point decline in 2020, adding to the downside risks stemming from recent bushfires.

Aussie equities feel the strain

Australian investors have already felt the impact, with the Australian bourse posting its biggest one-day fall for the new year on 28 January.

China and travel-exposed companies were the hardest hit, including Fortescue Metals (ASX:FMG), Qantas (ASX:QAN) and Webjet (ASX:WEB).

Yet should China and the world overcome the coronavirus, the outlook might not be as bleak as feared.

Robert Mann, head of Asian equity for Nikko Asset Management (Nikko AM), says Asian stocks could outperform their US counterparts in 2020 as US growth eases.

“The Chinese market had a very good year last year, as did every market despite all the trade tensions. But what drove markets last year was the US Federal Reserve – the Fed’s pivot in January started the rebound,” said the Singapore-based analyst.

“In the past couple of years, all you had to do was buy US stocks since US growth surprised on the upside and everyone else surprised on the downside, but that’s unlikely to be the case this year.

“For Asia and emerging markets generally, slower growth in the United States, very low interest rates from the Fed, oil prices not going too high and a not overly strong US dollar, coinciding with the return of the tech cycle is a pretty good backdrop”.

Australian investors seeking to capitalise on Asia’s anticipated gains could consider taking advantage via some Morningstar-rated exchange-traded funds (ETFs), such as the silver-rated Platinum Asia (ASX: PAXX) or the bronze-rated iShares Asia 50 ETF (ASX: IAA), or alternatively the Nikko AM New Asia (TGP0006AU), among others.

“Normally you’re worried after a great year whether it can be as good again … but it feels to me that we’re going to get a long cycle and Asia still has the growth in a world where growth is in short supply,” Mann added.

 

is a Morningstar contributor.

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