Asia forecast – Tiger vs. Rabbit

The Year of the Tiger (2010) was a great year for theworldwide markets, and for the Asian markets in particular. The financial crisis reduced growth all over Asia as it had done elsewhere. Despite some apocalyptic forecasts for 2010, the Asian markets staged a strong comeback. China overtook Japan as the second biggest economy in the world,while the Thai and the Indonesian stock indices gained almost 50%.

Surprisingly, the financial crisis, which had been triggered bysubprime lenders in the USA, affected the Asian markets far less than expected. This can be explained chiefly by the increasing level of regional market integration, with the market effectively decoupling itself to a certain degree. The Asian economies have done their homework – high savingrates and high foreign exchange reserves combined with low public debt and rising company profits and tax revenues are showing their effect. The tremors from the international markets don’t have the same capacity to shatter the Asian economies as they did ten years ago in the 1997 currency crisis. For the Year of the Rabbit (2011), the metal rabbit to be precise, the indicators for most economies and corporations in Asia are positive. Chinese astrology interprets the metal rabbit to be indicative of “agreement,harmonious balance and smooth progress”, a state which does not look to be put at risk even if and when several governments in the region withdraw the extensive stimulus packages currently being provided. This could be termed a“virtuous circle of growth”, where rising trade, profit and incom estimulate each other, resulting in a high level of stable growth.

All indicators seem to support this theory, with 2010 seeing growth in retail sales of 12%, growth of 4% in imports and exports, new jobs being created all over Asia and an increasein wages.

Growth of 5.4% is expected for the whole Asian region for 2010, and this figure is likely to rise to 6.2% in 2011. However, this does not include Japan, which is struggling with high sovereign debt amounting to over 220% of the GDP. Not accounting for Japan, which was formerly the second largest economy in the world – a position which it had since 1968, growth in Asia would be 7.8% for 2010 and 7.4% for 2011.

In other words, Asia is continuing in its role as the global growth driver as it has done for the past ten years.

There are, of course, some risks. Continuing appreciation of the local currencies against the US dollar could dampen exports. Certain sectors such as real estate, fuelled by cheap credit and speculation, may overheat. However, these problems have already been identified and governments are examining these issues in more detail. Inflation, which is being fuelled by the rapid rise in demand for commodities and foods, together with excess liquidity – due in part to what the Asians perceive as being a rather aggressive “quantitative easing” on the part of the USA – is somewhat higher, even if it seems to currently be remaining at a manageable level.

Consumer products, infrastructure, commodities and energy have been and remain particularly attractive investments. On the whole, the Asian markets still seem to be geared to growth, a growth that has a stable basis and the potential to make Asia the world’s most important market for the decades to come. They are a must for any forward-looking investor.

Of course, Asia is much more than just China and India, the two titans attracting the lion’s share of the public attention.

Although together they represent 2.5 billion of the world’s population of 6.5 billion, with India’s 1.2 billion being worryingly young with a median age of 24.7 years, the 590 million people living in South East Asia should not be forgotten.

On the contrary: the ten Member States of the ASEAN (Association of South East Asian Nations), comprising in part Thailand, Malaysia, Singapore, Indonesia and Vietnam, have been showing impressive growth, with some being more developed and richer than certain European countries. Indeed, the ASEAN is the nucleus from which a type of “Asian Union” could one day merge. The ASEAN has been working closely with China, Korea and Japan in recent years. If the ASEAN plus three represents the future, then surely Free Trade Agreements are the flavour of the day.

Particularly noteworthy are two Free Trade Agreements (FTAs) that have been concluded over the past months. One FTA between South Korea and the European Union will be coming into effect in June 2011. Both parties expect the mutual trade volume to rise by €19bn, with €2.7bn less duty being paid; this is tantamount to a 97% reduction in duty. Germany, the EU’s largest exporter, is likely to benefit considerably from it.

The other FTA has been concluded between Taiwan and its mainland neighbour, the People’s Republic of China. China is already Taiwan’s most important trade partner and investment estination. The FTA will not only lower duty on hundreds of goods, it will also facilitate investment, thus further integrating the two economies. Improvements are also visible in the political relations between the two former civil war adversaries. Some anticipate that Taiwan will only be a sovereign country on a paper in a few years, with the political and economic circumstances rendering it effectively a Chinese province. It may be that a similar approach will be taken as with Hong Kong: that of “one country, two systems”.

This FTA is merely the most recent in a series of treaties concluded by China. Almost certainly the most significant was the agreement concluded with the entire ASEAN. The so-called “AFTA” (Asian Free Trade Agreement) has been in force since 1 January 2010 and has created the largest free trade area in the world, bringing together 1.3 billion Chinese and 590 million South East Asians. India will have joined by 2015 at the latest, thus covering one third of the world’s population. Moreover, China, India and the ASEAN countries have signed a letter of intent regarding enormous infrastructure projects intended to facilitate transport and trade in South East Asia and link China and India by road and rail. The plans include projects such as the Greater Mekong Subregion Highway Expansion Project, an extensive highway loop between Laos, Vietnam, Cambodia, Thailand and Myanmar. Another project aims to build a railroad between Yunnan province in South China and Singapore via Laos, Vietnam, Thailand and Malaysia, thus finally connecting South China to the deep-sea harbours of the region, providing access to the world markets.

In short, development in Asia – a region in which every second US dollar earned today is earned by selling from one Asian country to another – is marked by increased integration. While not yet fully decoupled from the other world markers, a genuine economic powerhouse is awakening and is proactively shaping its future. It will continue to rapidly reshape the world as we know it.

This article was originally published in Berenberg Bank Newsletter – Asian Monitor – Issue 1

(Jan 26th, 2011, N° 03 / 2011)

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