Fund Manager Views - OCBC Wealth Management

Is this the right time for Asia to emerge from the West’s shadow?

29 May 2009

Henderson Global Investors' fund manager, Mr. Mike Kerley, highlights why Asian markets - particularly China - appear uniquely placed to emerge from the global recession in a position of strength.

After an extremely volatile start to the year, global markets have experienced something of a revival in the last six weeks or so, largely as a result of improving economic data coming from the U.S. and the general notion that global policy initiatives to combat the downturn are starting to gain traction.

It should be remembered that stabilisation is not the same as recovery, therefore the recent bounce should not be over-played. We expect markets to remain volatile throughout the year as further economic newsflow - both positive and negative - is fully digested.

Moreover, following their recent equity market strength, the likelihood is that we can expect a period of consolidation as investors look to take some profits.

The point to consider is that now that stability has been reached, where next for Asian markets?

The answer lies in the fact that the recent downturn has not been one of Asia's making. Asian equity markets have been pegged back by the underperformance from the rest of the world, even though below the surface the differences between the two regions are quite pronounced. The financials crisis almost drained the lifeblood from Western economies whereas in Asia it has merely been a flesh wound.

While governments in the West have spent billions in order to support a financial sector close to ruination, Asian banks have needed nothing like the same support. Asian banks have not had to contend with the liquidity problems associated with their U.S. or European counterparts and (with the exception of Korean and Australian banks) have been successful in maintaining a far more frugal loan to deposit ratio.

The scale of Chinese policy measures continues to impress

Government policy measures aimed at stimulating Asian markets should be able to exert a stronger impact on the real economy, because although there is always a lag between policy implementation and the subsequent impact on the economy, capital is still being absorbed at a far quicker rate than in the West. China remains the most notable example of this. This year, the Chinese government has announced a series of measures aimed at sustaining domestic demand and stimulating growth, including:

· Aggressive cuts in interest rates · Scrapping of controls on bank lending · Various measures to encourage home-buying · A RMB 4 trillion stimulus package (covering public housing, infrastructure projects, health and education) over a two-year period

The fiscal stimulus is expected to rebalance the sources of economic growth, moving away from investment and export-led areas and more towards domestic consumption-driven growth. The chief beneficiaries of this would include property developers and industrial sectors, steel producers and power generation companies. The long term success of these policies will ultimately dictate whether China can emerge from this downturn fully de-coupled from the U.S.

The long-term outlook for the region

In the short-term, the outlook for Asia remains very much dependent on the depth and longevity of the global recession, as markets are still heavily reliant on external growth. If the economic recovery can continue, the region should benefit from an improved sentiment and hopefully export demand can pick up if the global recession proves to be relatively short-lived.

In the long-term, Asian markets are positioned to grow considerably compared to their western counterparts. The real challenge for governments - particularly China - over the next five to ten years will be to see how far they can move from an export-led economy to a more domestic-focused economy, based on consumption and investment strength.

This will be no easy feat but if policy measures are successful in mobilising savings effectively and converting them into assets, we could see a significant change in emphasis from those investors who recognise that a region with long-term growth prospects, combined with genuine economic stability, has a great deal to offer.

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