Our Opinion: 2015
Asia’s fortunes rising
Asian markets have had a terrible year. The MSCI Asia Pacific ex-Japan index has fallen by more than 20% from April’s peak, taking it to a three-year low. This has been driven primarily over fears over a hard landing in China, falling commodity prices and the prospect of higher interest rates
In recent years, many Asian countries have become reliant on sales to China, so the region’s growth will be undermined if China doesn’t pick up soon.
Exports to China make up around 10% of GDP, on average, for its regional neighbours, although the figure ranges from the low-single digits for India, Indonesia and the Philippines to 25% for Hong Kong. The good news is that worries over a hard landing in China are receding – this may prove a good entry point for long-term investors.
China’s clouds are lifting
The shift from industry towards labour-intensive services is keeping the jobs market tight, which should buoy consumption. Recent monetary easing – interest-rate cuts and less stringent conditions on bank loans – has revived credit growth and property sales. Government spending has risen and manufacturing activity seems to be stabilising.Although exports are still falling, foreign demand seems to be picking up.
Any improvement in China should boost Asia’s exports. Interest rates across the region are near all-time lows. Subdued inflation means any further falls in Asian currencies should not prompt rapid interest rate rises. Capital Economics expects GDP growth in emerging Asia to rise to 5.6% in 2016 from 4.3% this year. In 2004-2013, annual growth averaged 7.4%.
While the outlook has improved, markets are still gloomy – which often spells opportunity for investors. Naomi Rovnick reported in the Financial Times that many analysts consider Asian stocks are “too cheap”.
The MSCI Asia ex-Japan index is on a price-to-book ratio of 1.35, the lowest since the global crisis. The index’s price/ earnings ratio of 11.4 compares favourably with the average of 14 over the past decade.
This doesn’t seem much to pay for the region’s potential. A widely cited Ernst & Young’s study from 2013 estimates that two-thirds of the world’s rapidly growing middle class – people with enough money to buy consumer goods – will live in Asia.
In Indonesia, the number of people in the middle-income bracket wille more than double in five years. Hugo Young from Aberdeen Asset Management suggests this will lead to “huge pent-up demand for housing, consumer durables, transport and banking services.” He also thinks that the region has begun “to emerge quietly from China’s giant shadow”.
The ten nation Association of Southeast Asian Nations, ASEAN, has developed into something resembling a single market of some 625 million consumers. Youthful populations will swell the ranks of the region’s labour force for years to come.
Many of our clients are increasing the exposure they have to Asia within their portfolios. The local volatility also means that many in the region will be drawn to having their investment strategy managed in a more mature, highly regulated market like London. I am looking forward to visiting the region in two weeks.