What happened to decoupling? One of the most fashionable theories of the past few years was that Asia would keep going while the West faltered, thus propping up global growth. Yet now “there’s not a country in the region that is not slowing sharply or in outright recession”, says Stephen Roach of Morgan Stanley Asia. No wonder, given that Asia has become more, not less, reliant on external demand over the past decade. Exports now comprise 47% of Asia’s output, up from 37%, says Roach.
With the global economy entering the most synchronised recession since the 1930s, as the FT’s David Oakley puts it, emerging Asia is suffering. In Singapore, where exports fell by 21% year on year in December, GDP slid by an annual 3.7% in the fourth quarter and is expected to contract by up to 5% in 2009. In South Korea, where the downswing has been exacerbated by tighter credit squeezing a highly indebted domestic economy, GDP slid by 5.6% quarter on quarter in the last three months of 2008. GDP for 2009 is set to shrink by 5%, reckons Capital Economics; ditto Taiwan, where industrial production is down by more than 30% year on year.
Then there’s China, which, as Morgan Stanley points out, now accounts for 44% of regional GDP, compared to 25% in 1996, so “its ability to engineer a soft landing is critical to Asia’s growth outlook”. Unfortunately, it appears to be having a hard one. Annual growth fell to 6.8% in the fourth quarter, a ten-year low. Quarter-on-quarter growth figures aren’t published, but some economists think the economy could well have shrunk from the third to the fourth quarter. Imports are “unambiguously plunging”, says John Foley on Breakingviews. Taiwanese exports to China were down 21% year on year in December. Government infrastructure spending may bolster growth this year, but the housing market and consumption (consumer confidence is rapidly dwindling) remain weak. China certainly “cannot save the rest of the region”, says Credit Suisse’s Dong Tao.
Given all this, it’s no wonder that earnings forecasts are on the slide – but Merrill Lynch reckons they “remain lofty” and inconsistent with the “grim recessionary year” awaiting the global economy. Asian stocks “basically go up and down with global growth expectations”, which are still falling. Meanwhile, valuations also suggest we’re not out of the woods yet. The MSCI Asia ex-Japan index, which posted its worst annual return for over 20 years in 2008 – it lost 53% – is very cheap at about 1.3 times book value. But according to Citigroup, there is still some downside risk. Previous bear markets have reduced the ratio to just under one. And valuations don’t tend to expand again until 21 months have passed; we have only had 14 months of sliding valuations.
A further problem is that not only are Asia’s economies coupled to the West, but its markets are too: last year the MSCI index moved almost in lockstep with Wall Street, as Christopher Wood of CLSA points out. Asia’s longer-term outlook is better than the West’s: government and corporate debt is low and household debt as a proportion of GDP ranges from around 3% to 70% (compared to above 100% in Anglo-Saxon economies), so there is plenty of scope for consumption to increase and offset dependence on exports. But in tough times, correlations between global markets tends to rise as increasing risk aversion hampers all equities. So as long as uncertainty over the ultimate worldwide impact of the credit crunch endures, Asia’s attractions are likely to take a back seat and its markets are set to struggle.