Serious economic stuff: The case for Asia amid melting global markets
I don’t subscribe to the theory that China or Asia will be immune from a US economic slowdown. But like many global economists, I do believe the negative effect on China of a US slowdown will not be enough to dampen the region’s stellar growth prospects and investment potential over the next five years. As the chart below shows, growth in Asian exports to the US is slowing. But less than 2% of China’s current GDP growth is derived from exports to the US.
My view is SMSF and high-net-worth investors should be increasing their portfolio allocation towards Asia in light of the problems in the United States and parts of Europe.
In a relative sense, Asia, excluding Japan, still looks the place to be as the table from Morgan Stanley Research on comparative economic growth shows.
I suspect these growth rates could be revised down, because, as I have written in previous newsletters, the US really has some problems.
But there are still five reasons why Asia, excluding Japan, looks good in my opinion.
The first is strong growth in the share of Asian exports to intraregional countries such as China is offsetting the fall in the share of exports to the US. For example, Asian countries have increased their share of exports to China from 3.9% in 1990 to 13.2% in 2006, as the table shows.
The second reason is interest rates in Asia are either flat or falling, and countries such as Hong Kong, Singapore and Taiwan are negative in real terms.
The third reason is domestic consumption growth in Asia is proving resilient, even in the face of falling demand for Asian exports from the US.
The fourth reason is Asian countries generally have strong fiscal positions, and external debt to GDP has fallen while foreign reserves to GDP have risen.
The upshot is most Asian countries are well placed to increase public spending if their economic growth slows sharply due to the slowdown in western economies.
Rising infrastructure spending also bodes well for Asian economic growth this year.
The final, arguably most important, reason for the optimism is that average valuations for stocks in Asia (excluding Japan) look attractive relative to other markets. After recent falls, the average forward PE multiple for Asian stocks has eased to just below its long-term average of 13.
Lion Capital expects earnings growth for Asian companies to fall from 18% to 10%, still much higher growth than companies in developed markets. This is why it is vital for Australian investors to have the support of a great stock picker like Lion Capital.
If you would like to learn more about Lion Capital, click here.
