Asian markets are “stuck in a rut”, says HSBC. The regional benchmark, the MSCI Asia ex-Japan Index, has been caught in a range between 420 and 500 since last August. And the regional and global outlook suggests that a big move upwards is unlikely for some time.
Emerging Asia has made an impressive comeback from the global slump. The region’s average growth rate dipped below 2% in 2009, but the consensus is forecasting GDP growth of 7.5% in 2010. All Asian countries’ GDPs are back to pre-crisis levels of early 2008, with the Chinese, Indian and Indonesian economies now 10%-20% bigger. Exports have made a full recovery too, and industrial production in the second quarter was growing at an annual pace of 20%. What’s more, consumption is up by 17% from September 2008, says DBS Group.
Growth will slow
Asia’s momentum is set to slow, however. Asia’s central banks “are pushing ahead” with interest rate hikes now that inflation rates are almost back to the 20-year average in the region and “surely headed higher”, says DBS. And the “best of the rebound in exports and manufacturing” has come through, says Capital Economics. The rebuilding of inventories in the region is largely over and the global economy is slowing down.
China, a key source of export growth, is also applying the brakes. In the first five months of 2010, it contributed more to the export growth of Hong Kong, Malaysia, Singapore and Thailand than America and Europe combined, notes Standard Chartered. The question is how Asia would cope with a renewed slump in the West.
Still a middleman?
The region certainly won’t be able to shake it off altogether. Asia has “diversified, but not decoupled”, says Standard Chartered. Regional trade is clearly becoming much more significant given that China and intra-Asian trade have been the region’s most important sources of export growth in the first five months of this year.
But China is a “middleman” in the Asian manufacturing supply chain (goods are often processed in China and re-exported).And its absorption of Asian exports reflects indirect demand from America and Europe – these regions accounted for over 33% of China’s export growth between January and May 2010. Morgan Stanley recently pointed to the close link between Asian and US growth, a result of the fact that “US consumption fuels the Asian production cycle”.
But the impact of another global downturn will vary. It would be worst for Singapore, Hong Kong, Malaysia, Taiwan and the Philippines. These small, highly export-dependent economies suffered deep recessions in the post-tech slowdown of 2000-2001 and the credit crunch, as DBS points out. The larger countries, where the domestic economy is more important than exports, such as India, Indonesia and China, are less exposed and thus more resilient – they never shrank on an annual basis during the latest downturn.
What it all means for markets
The hope is that, over time, Asian markets should gradually shake off Wall Street’s influence as more and more investors acknowledge that Asia’s fundamentals are superior to the West’s. But in the meantime, Asian markets are still far from decoupled, as HSBC points out. The region remains especially vulnerable to foreign investors’ risk appetite. When risk aversion rises, money tends to flow out of the area.
So jitters over another downturn bode ill. Even if concern over another slump in the West eases, there is no ‘catalyst’ for a bounce in equity markets. Regional recovery is fading, earnings forecasts are being cut and valuations aren’t compelling. Long-term, the continent remains as appealing as ever, but stocks look set for a rocky ride in the next year or so.