Last year many investors were hoping that fast-growing Asia and its markets could “decouple” from weak growth in America and the rest of the developed world. “So much” for that, as Leslie Norton says in Barron’s. The MSCI Asia ex-Japan index has fallen by 35% to a 16-month low from its October 2007 peak, and further falls are on the cards.
Signs of weakness in Asia have mounted as the US-led global slowdown “is taking a toll on Asian economies”, lowering demand for their high-tech exports, says Lim JI Won of JP Morgan. What’s more, high inflation in the region has prompted central banks to tighten monetary policy and dampened consumption.
Taiwan has lowered its growth forecast for 2008 to 4.3%, down from 4.8% three months ago and the weakest pace since 2003. Singapore, where growth slumped to just 2.1% year-on-year after shrinking in the second quarter and retail sales dropped in June, now expects its non-oil exports to shrink by 2%-4% this year. Hong Kong’s exports slid for the first time in two years in June and consumption and investment growth are slowing.
Container traffic from Asia to Europe is now at an annual -0.5%, compared to double-digit growth only a year ago, notes Citigroup. In China, which Goldman Sachs expects to grow by 9.5% next year, compared to almost 12% in 2007, consumer confidence is at a two-year low, while export growth has eased and a “continued deterioration” is likely throughout the year as “US and European consumers stay at home”, says Stephen Green of Standard Chartered.
Stephen Roach of Morgan Stanley notes that emerging Asia’s exports as a proportion of GDP rose to a record 45% by 2007, and the American consumer, the biggest source of emerging Asia’s external demand, is now “in trouble”. The growth in Chinese exports to the US slowed to 8% year-on-year in June, following annual average gains of over 25% in the years between 2003 and 2007. America accounts for around 20% of China’s external demand and Japan and Europe, which make up around 30% of overall exports, are now faltering. “Decouplers” have also forgotten how small Asia’s economies remain, Desmond Lachlan of the American Enterprise Institute noted earlier this year. The Chinese economy is barely 15% the size of America’s.
On the stockmarket front, it seems investors have yet to adjust fully to the darkening outlook. Earnings forecasts for 2008 have fallen to 4.4% from 10.4% at the start of the year, notes Citigroup’s Markus Rosgen, but “it would be comforting to see a greater sense of realism” on the 2009 numbers, which still foresee growth of 15%. What’s more, margins are so far only expected to contract in three countries, yet “commodity costs have risen 43 times faster than export prices over the last year”.
Earnings growth is likely to be negative come year end and stay that way on an annual basis until the second half of 2009. Asian markets are due a “wake-up call” on the earnings front later this year. Historically, Asian markets have yielded positive returns over the subsequent year once 12-month forward earnings forecasts have been falling for nine months – they are still topping out – and the region’s price-to-book value has hit 1.4; it is now at 1.9. The bottom? “We are not there yet”.
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