As the world recovers from the deepest recession in over 50 years, Asia is leading the way, says the IMF’s Anoop Singh. Emerging Asia should grow by 8.7% this year, up from around 5% in 2009. The recovery in world trade and the global inventory bounce, along with China’s investment spree, have boosted industrial production and exports. But domestic demand has also “developed a strong momentum”.
Consumers, who unlike their Western counterparts are unencumbered by debt, are bullish. Singapore bank DBS says private-sector consumption in emerging Asia is 7% higher than before the credit crunch began.
Nonetheless, headwinds for economies and stockmarkets are mounting. An immediate problem is inflation, a result of strong growth and higher commodity prices. “Most central banks are somewhat behind the curve,” says Thomas Kaegi of UBS Wealth Management. Capital Economics says India’s inflation problem (retail price inflation is at 15%) is “acute”. The necessary interest-rate hikes across the region will lower growth and earnings. Regional heavyweight China is already reining in growth.
Stagnant growth in the developed world once the global inventory rebound wears off is another potential problem. The region depends on exports, and Asia ex-Japan’s private consumption is only 40% of American levels.
China’s economy is around a third the size of Europe’s or America’s. Chinese consumption would have to rise by more than 30% to offset a slide of just 5% in US consumer spending, says Jeremy Warner on Telegraph.co.uk. So it’s hard to see the region ‘decoupling’, or shrugging off a growth slowdown in the West. The decoupling theory proved wrong in the global downturn of 2008, so “why should it hold on the way back up”? asks Morgan Stanley.
Decoupling doesn’t work for stockmarkets either. The MSCI Asia ex-Japan index has swung wildly and barely risen this year amid jitters over Europe’s debt crisis and Chinese tightening. Furthermore, valuations are no longer compelling: the index’s book value is back to the long-term average of two. So while the long-term outlook remains excellent, Asian markets are set for a rocky ride
over the next year or so.