19th February 2015
Asian equities rose in 2014, a year marked by the start of monetary divergence and widespread political change. Hugh Young, Elite Rates fund manager of both the Aberdeen Asia Pacific Equity fund and the Aberdeen Global Asian Smaller Companies fund, discusses the continuation of these socio-economic themes in 2015 – and why they don’t compromise Asia’s long-term growth.
Looking forward, what are the major headwinds for Asian economies?
Asia faces a number of risks in 2015. Key among these is China’s slowing economy. The November interest rate cuts underscore the seriousness of the problem. As well as economic turbulence, we have also seen socio-political turmoil. In Hong Kong, streets have been cleared of protestors, yet the mood remains restive. Nevertheless, we think that any flare-up will be contained, with the authorities continuing to exercise restraint. We are positive about China’s long-term growth trajectory.
In India and Indonesia, the pace of reforms is encouraging, although failure to live up to expectations could exasperate investors. Stability has returned to Thailand after the coup. However, supporters of former premier Thaksin remain fervent and any slip-up by the military could re-ignite political unrest.
What consequences do a strengthening US dollar and the normalisation of US monetary policy have on Asia’s growth prospects?
The prospect of a US rate hike and a stronger dollar could compel fund outflows from Asia in the near term. But we think the normalisation of American monetary policy is a good thing as it weans markets off speculative capital that is unhealthy over the long run. Furthermore, Asia is on a firmer footing today to withstand short-term outflows than in late 2013, when it experienced the first tremors from tapering.
There are a number of concerns over debt bubbles in China and declining GDP growth – should investors be concerned?
Despite concerns over its shadow banking sector and a potential property bubble, Chinese stocks rose as the government continued to announce targeted easing measures and the central bank cut interest rates to boost growth. While the potential for a credit crisis remains, we believe Beijing has the balance sheet strength to mitigate systemic risk in its financial markets.
Will we see more QE or other forms of stimulus implemented by Asian policy makers?
You never know when that QE moment comes. That being said, inflation eased in 2013 because of cheaper oil, allowing authorities to cut fuel subsidies that were a strain on budgets. Unlike the US, some Asian economies may choose to cut rates to stimulate demand as inflationary pressures ease on the back of lower oil prices.
What is the long-term outlook for Asia?
In the next 20 years nothing is really going to change. Outlook for Asia is as good as ever. We can spend a lot of time discussing economics but economics and stock-market returns are not necessarily linked up. China is the prime example of that.
Asia’s long-term story still holds, buttressed by rising wealth, young populations and pent-up demand for housing, consumer durables, transport and banking services. Valuations at a price-to-earnings ratio of around 12.5 times do not seem extreme and remain at a discount relative to developed markets.