World Investment Outlook – Chapter four: Asia

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Politics

Hard to believe as it may be, Hong Kong found a way of upstaging even the trade tensions between America and China and the further cooling of relations between Japan and Korea in 2019. The Occupy Central movement wrote the headlines for most of the second half of 2019 as Hong Kong residents protested against a law introduced by Hong Kong Chief Executive Carrie Lam that would have enabled China to arrest them and then have them put on trial over the border.

Carrie Lam’s term ends in 2022 and that can probably not come quick enough for her and relations between Hong Kong and China will have a huge influence on the region in 2020 and beyond.

Investors with Asian exposure will also be looking for a thaw between Japan and South Korea and also America and China, where trade talks are ongoing. The elections due in Mongolia, Myanmar, Sri Lanka and Singapore may therefore find themselves overshadowed, although Taiwan and South Korea also head to the ballot box in 2020, in January and April respectively.

Economics

Economists and investors alike continue to fret over a loss of momentum in both China and India. Whether the slowdown is the result of global concerns, such as trade and tariffs, or country-specific reasons relating to debt and a reliance on wobbly banks or even the so-called ‘shadow banking system’ remains to be seen. The answer probably lies somewhere between the two and frankly any G7 country would still be thrilled to be able to call GDP growth of 5% or 6% a year (or more) a ‘disappointment’.

China and India both lost some economic momentum in 2019

Source: Refinitiv data

In China, President Xi and the Communist Party are not just letting events unfold around them. The Government has increased export rebates, cut corporate pension contribution requirements and trimmed taxes. The People’s Bank of China has also done its bit in the form of interest rate cuts and a decrease in the reserves that banks are required to hold in a bid to boost lending.

China’s Government debt is relatively low at $6.5 trillion or 48% of GDP, so there looks to be plenty left in the tank when it comes to potential stimulus. But add in financial sector debt, household debt and soaring corporate debt and those figures rise to around $40 trillion or nearly 290% of GDP, which looks less comfortable.

As such, the authorities in Beijing have a tricky balancing act, as they to encourage growth with cheap cash and fiscal stimulus, yet at the same time stop debt-fuelled housing and financial markets from becoming too bubbly (although in this respect, it could be argued that China is no different from the US, UK, Canada, Australia or Sweden, for example).

This means growth could take on more of a stop-start pattern than previously, as stimulus boosts the economy (as per 2016), only for its effect to start to wear off (as per 2018) and the authorities to then step in again (as per 2019).

Concern over economic growth prompted interest rate cuts in Hong Kong, India, the Philippines, Australia, New Zealand, Sri Lanka, Malaysia, Papua New Guinea, Indonesia, South Korea, Thailand and Vietnam. The only Asian nation to hike rates was Pakistan, to 13.25% from 10%, as Islamabad called in the International Monetary Fund for a $6 billion bail-out, the nation’s sixth rescue since 1980.

Australia and New Zealand both cut interest rates in 2019

Source: Refinitiv data

But, as in the West, concerns are gathering that monetary policy was losing its effectiveness, especially as interest rates are already at or near record lows in so many countries. That is bringing fiscal policy into play, to also mirror trends in the West, as austerity and budget rigour lose their appeal relative to growth and (in many cases) the prospect of re-election.

Having got the interest rate cuts he craved from the Reserve Bank of India (albeit only after Urjit Patel quit as governor after a dispute over economic policy and was replaced by the more accommodating Shaktikanta Das), New Delhi’s Prime Minister Narendra Modi turned on the fiscal taps, offering income support to farmers and a cut in corporation tax.

South Korea unveiled a $3.1 billion fiscal stimulus package in spring and then its most expansive budget ever in the autumn. Thailand also uncorked a $10 billion tax-and-spend plan to try and revive its dawdling economy.

Markets

Slowing economic growth in China and India, political unrest in Hong Kong and trade tensions between Korea and Japan help to explain why Asia’s stock markets will not necessarily look back on 2019 with any great fondness, even if total returns in sterling terms still leave those investors with exposure in the black for the year.

Asia ranked sixth among the eight major geographic options in 2019 …

Source: Refinitiv data, based on MSCI Asia Pacific ex-Japan index. Total returns in sterling terms.

Pan-Asian indices have not been helped by China, whose Shanghai Composite benchmark is no higher than it was in early 2007, as doubts over the quality and quantity of the country’s economic growth continue to linger.

… not helped by how China’s stock market is no higher than it was 12 years ago

Source: Refinitiv data.

Financial markets worldwide still appear to be working on the broad premise that both Presidents Trump and Xi need a deal so one will be done, even if they may be disappointed by the progress achieved so far. The intertwined issue of technological supremacy unfortunately means that reaching a deal may be a lot less simple than it looks, although at least Chinese stocks are still discounting a pretty negative outcome from the negotiations with Washington. Any trade deal with the US, assuming there is one, could therefore be a step on the road to a more sustainable recovery for the Shanghai stock market and therefore Asia more widely, especially as the Singaporean, Korean and Taiwanese economies are also very sensitive to pan-regional and global trade flows.

Investors might also like to ponder the claim of Asian equity markets to be a potential option for income-seekers. A prospective 3.1% yield looks well supported since Asian firms still remember the 1997-98 financial crisis with a shudder and continue to nurture healthy balance sheets as a result.

That yield is bang in line with the 20-year average, although Asian equities, excluding Japan, actually look a little more expensive on earnings, relative to their history.

Russ Mould, AJ Bell Investment Director

Next chapter

Read more from our World Investment Outlook 2020 series:

World Investment Outlook - Chapter one: UK

World Investment Outlook - Chapter two: USA

World Investment Outlook - Chapter three: Japan

World Investment Outlook - Chapter four: Asia

World Investment Outlook - Chapter five: Western Europe

World Investment Outlook - Chapter six: Emerging Markets

These articles are for information purposes only and are not a personal recommendation or advice.


russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.