After months of being told that everything was “the worst since the Great Depression”, few can blame investors for latching on to the positives. The freefall in the global economy does at least seem to have slowed. Good news is also coming out of several Asian countries. Indeed the region remains the most likely to lead the world out of recession.
Nonetheless, there are still reasons to remain cautious. Markets are banking on a recovery and a rapid resurgence of the Asian growth story. But what we’re seeing at the moment points to several months of stabilisation, not a quick rebound …
Stronger numbers from India
First, let’s take a look at India. I last covered the outlook and the election results here; I won’t rehash the entire piece, so if you want more detail please take a look at that piece before reading on.
The big news since I wrote that piece was the preliminary GDP estimate for January-March. This was surprisingly upbeat; at 5.8% year-on-year, it was this better than anyone was expecting. The previous quarter was revised up as well.
When looking at Indian GDP numbers, note that India reports growth on a year over year basis, while most of the world reports it on a quarter-on-quarter seasonally adjusted basis. Year-on-year numbers are less helpful, since they overstate the current rate of growth when the economy is slowing and understate it when the economy is accelerating. So you can’t make a direct comparison between these numbers and say America or Europe; measured on the same basis, India is growing at a slower rate than 5.8% – although probably still growing.
Year-on-year numbers are normally used by countries that have trouble calculating seasonal adjustments, perhaps because the economy is evolving quickly or because agriculture is a large part of it (harvests depend heavily on the weather and so the pattern can be inconsistent from one year to the next). China also uses year-on-year numbers and its data is even harder to interpret than India’s, as I discussed here: Better news from China.
Government spending supports growth – but that can’t continue
Assuming India’s latest GDP number doesn’t get revised down too much (which is possible), this release is encouraging. I may be too bearish on my expectations for India. But a look at the breakdown suggests we shouldn’t get carried away with the growth story yet.
Government spending provided a substantial boost in the last two quarters. For the fiscal year just ended, it was up 20.2% year-on-year, while private consumption was up just 2.9%. The equivalent numbers for the previous year were 7.4% and 8.5% respectively. With a widening budget deficit, there’s limited scope to keep this up, so we need to see the private sector picking up again soon if proper growth is to resume.
So far the news on that is mixed. India doesn’t release much high quality, high frequency data, but one stat to keep an eye on is bank lending to companies. Given that the big expansion in credit helped drive the recent boom, a prolonged lending slowdown is likely to hold back growth. As you can see below, the loan growth rate is still dropping.
On the plus side, we are seeing signs that property developers can shift units with aggressive price cuts and there are possible signs of improvement in vehicle sales, as I mentioned in my earlier piece. And this week, Tata Motors successfully refinanced the bridging loan it used to buy Jaguar Land Rover last year, which may be encouraging for other Indian corporates looking to tap the international loan markets (although Tata had to pay a significantly higher rate than on the original loan).
Overall, it looks like there’s a real chance that India is doing better than expected – but I think it’s a case of the economy stabilising, rather than getting ready for rapid growth. The ingredients for a private spending boom, or a further government boost, don’t seem to be there. And the more that foreign investment and lending pile in as a result of the elections, the more vulnerable any pickup will be to the next (and hopefully last) leg of the bear market that seems likely to kick in later this year (see: We’re heading for a summer sell-off).
So while last month’s election result has made me more bullish on India’s long-term story, I’m not inclined to chase the post-election rally. The Sensex has come a long way in the last couple of months and a big setback is likely once the enthusiasm wears off.
China’s no clearer than before
What about the outlook for China? It looks as if the economy picked up in the first quarter after slowing very sharply in the second half of the last year. Indeed analysts who have tried to turn the official GDP numbers into a seasonally adjusted quarter-on-quarter series typically come up with a boost of three-four percentage points to the growth rate (again, Better news from China for more on this).
Last year’s slowdown wasn’t just due to falling exports; in fact, if you look back it seems to have begun well before exports fell off a cliff at the end of 2008. The government’s decision to clamp down on lending, and cool the overheating property, was probably as significant. With lending controls relaxed again, loan growth has soared, up almost 30% year on year as you can see below.
That said, it looks like some of the official data may be overstating the strength of the rebound. Take fixed asset investment; reportedly this grew at almost 40% year-on-year in real terms in March.
But that kind of strength doesn’t fully fit with other indicators, such as steel prices remaining relatively muted and electricity production dropping year-on-year (you can ignore the early year spike in the electricity series – it’s because the Chinese New Year effect isn’t smoothed out in this chart).
Sure, global overcapacity in industries such as steel is partly responsible for stagnant prices. Similarly, marginal metals producers being forced to shut down will be holding back electricity producers (since these are energy intensive sectors).
But there are other factors at work too: it’s likely that local and provincial governments have overstated the amount of investment that’s already underway, in order to be seen to be doing their best to boost the economy. This means that official numbers, such as investment data and GDP, could be overstating the speed of China’s recovery.
Oddly, that’s probably for the best. One of the big risks for China is that growth ramps up again too quickly, accompanied by too many new loans, asset bubbles and poor investments. It would be a relief to see a steadier recovery than the loan growth and investment data suggest – which is what steel, electricity and other encouraging (but still-muted) indicators such as the purchasing managers indices are pointing to.
But investors who are betting that Asia is full steam ahead once again may be disappointed. The mainland Chinese market is closed to most foreign investors, so the easiest route in is through Hong Kong – and as you can see, the Hang Seng China Enterprises Index has almost matched the Sensex in strength since this rally got under way.
Stabilising, not booming
It’s a similarly mixed picture elsewhere in Asia. Indonesia, the other major domestic-demand story, posted a reasonable 4.4% year-on-year GDP number for the first quarter; however, this was buoyed by government spending ahead of the elections. Private spending remains pretty solid for now, although vehicle sales are slowing. But business investment growth slowed to just 1.9% year-on-year, although the central bank’s business survey points to an improvement in the coming months.
The rest of emerging Asia is too small and trade dependent to develop much domestic momentum; their economies can’t stabilise until Western demand does. Again, the evidence here is that this is happening slowly. Thailand for example reported a 7.6% month-on-month seasonally adjusted increase in manufacturing output in April, as electronics orders picked up. But it’s not all one way; Korean exports – which had picked up well from the low in January – took a step back in May, falling 28.3% year-on-year, compared with 19.6% year-on-year the previous month.
Meanwhile, Japanese data is looking much better and there’s a good chance GDP growth will be positive this quarter. However, that’s a reflection of quite how hard the economy plunged over the last few months, rather than a sign of strength. I argued here that Japan is an attractive investment, but that’s based on valuations that are pricing in an apocalypse. It’s not a vote of confidence in the Japanese economy, which remains weak and still has structural problems to sort out.
Overall, these are frustrating times for investors. Asia – if not the rest of the world – is closer to the end of this mess than the beginning, but we’re not there yet. Investors are getting carried away and there are disappointments to come when the V-shaped recovery fails to materialise. While valuations in most markets are still reasonable, it isn’t yet time to be completely bullish.
Finally, there won’t be an issue of MoneyWeek Asia next Monday as I am away. However I’ll be back with the next email in a fortnight.
In other news this week …
| Market | Close | 5-day change |
|---|---|---|
| China (CSI 300) | 2,939 | +6.5% |
| Hong Kong (Hang Seng) | 18,680 | +2.8% |
| India (Sensex) | 15,104 | +3.3% |
| Indonesia (JCI) | 2,079 | +8.5% |
| Japan (Topix) | 917 | +2.1% |
| Malaysia (KLCI) | 1,076 | +3.0% |
| Philippines (PSEi) | 2,529 | +5.8% |
| Singapore (Straits Times) | 2,396 | +2.9% |
| South Korea (KOSPI) | 1,395 | -0.1% |
| Taiwan (Taiex) | 6,767 | -1.8% |
| Thailand (SET) | 605 | +7.9% |
| Vietnam (VN Index) | 479 | +16.3% |
| MSCI Asia | 94 | +0.9% |
| MSCI Asia ex-Japan | 399 | +2.6% |
Chinalco, the Chinese state-controlled metals group, saw its $19.5bn deal to take a stake in heavily indebted Australian miner Rio Tinto collapse after the equity market rally opened the door to a rights issue from Rio. Chinalco’s offer had been unpopular with both investors – who fear the group would tie itself too closely to one of its biggest customers – and many Australian politicians who campaigned for the deal to be blocked. Smaller China-backed investments in two other local miners, OZ Minerals and Fortescue Metals, have been approved by the government and are still proceeding.
Many other high-profile firms are also taking advantage of stronger markets to raise capital. Major deals this week included a S$1.437bn ($1bn) rights issue from Neptune Orient Lines, one of the world’s largest shipping companies; the firm has just announced a record $245m loss for the first quarter, driven by a 36% year-on-year drop in shipping revenues. Chinese property developer Hopson Development raised HK$1.59bn ($200m) in a private placement as investor expectations of a property market recovery grow.
Sichuan Tengzhong Heavy Industrial Machinery, an obscure Chinese manufacturer of construction equipment, has agreed to buy General Motors’ Hummer division, makers of the iconic and controversial off-road vehicle. Exactly why Sichuan Tengzhong wants the loss-making firm remains unclear. The deal seems to be at odds with China’s focus on fuel efficiency and rationalising an automobile industry of over 100 manufacturers so many analysts think that the deal will be blocked by Beijing.
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