Stuart Parks, head of Asian equities at Invesco Perpetual, and Dean Newman, the group’s head of global emerging markets, discuss the prospects for China and the outlook for the world’s developing economies.
Is 8% GDP growth really achievable for China this year?
Stuart Parks: Real indicators of economic growth – for example, power production – are actually very strong at the moment so, from what we are seeing, 8% growth is eminently achievable. As important as the actual number, however, is the composition of that growth.
What we will see is less of an emphasis on fixed asset investment growth and instead the return of exports as a significant contributor to the overall GDP pie. Domestic consumption is also likely to grow in importance.
How significant is the shift from export-led to domestically generated growth?
SP: China is always going to be a substantial provider of manufactured goods for the rest of the Western world but, over time, we are going to see the Chinese domestic economy becoming more significant.
The importance of domestic growth within China can be exaggerated, but plainly it is something the authorities believe is necessary to push the country’s economy forward over the medium term and also something that should, in time, help solve some of the global imbalances with which the world continues to struggle.
Is China in a bubble and, in particular, is there overinvestment in the property sector?
SP: None of the most important indicators are flashing red but that is not to say, if the Chinese authorities did not do anything at all, we would not get to a bubble eventually.
For example, the Chinese banks grew their loan books at 30% last year and, if they did that indefinitely, they would certainly be trouble. But the evidence seems to be there is quite a rapid slowdown in lending growth occurring now. As for a property sector bubble, compare it to some Western markets – for example, if you were just looking in economic terms, would you really buy a property in Mayfair at the moment?
It looks expensive and, in the same way, so do properties in the central parts of Shanghai and Beijing. So, yes, actual price growth went up some 20% last year but it came down quite a lot in 2008 so, again, the jury is out. If we continue in this vein, the bubble would probably reinflate, but my best guess is it is not going to do so.
Are we so fixated on China we are missing other important developments in Asia?
SP: It is right to be fixated on China – whether you are looking at Asia itself or the world as a whole, China is one of the major engines of growth. However, there are other big economic blocks in Asia of real importance too.
The obvious one is India, which itself is growing at 8% and is showing different development characteristics. But one should also look at some of the providers of commodities to China – obviously Brazil but, in Asia, the big one is Indonesia, which is a major exporter of, for example, palm oil to China. Indonesia itself has a huge population and a good domestic growth story.
How strong is the link between Brazil and China?
Dean Newman: The economic link between Brazil and China is important and it will only become more so. As an illustration, more than 25% of Brazil’s primary exports go to China – and that number is increasing. China has now also overtaken the US as Brazil’s largest trading partner and that is very positive.
Brazil has the agricultural produce and mineral resources China needs to fuel its growth and China has the financial firepower to help Brazil improve its infrastructure and undertake big mineral projects.
Is Brazil still an emerging market?
DN: Yes, and it still has further to go where Asian markets have led. Until now, the focus of economic growth has been on Brazil’s two big cities, Rio de Janeiro and Sao Paolo, but more recently we have seen stronger growth in the regions – for example, the North-East, the Centre-West around the capital Brasilia, and down in the south where there is engineering and agriculture.
A second theme that is really important for Brazil and its progression is the exit strategy. This is how Brazil will execute monetary policy through the phase of increasing interest rates. If Brazil manages that in an orderly manner and consolidates the gains it has made on lower interest rates and lower inflation, it will be really positive for the investment climate.
How do you see the investment environment in Latin America and Eastern Europe?
DN: One of the reasons we have had strong returns in Latin America has been because, for the last seven or eight years, politics has been very stable. This has helped create a positive backdrop for companies and individuals to make economic decisions.
For example, over the last 10 years, Mexico has seen a successful transition of power from what was basically one-party government while, in Colombia, we have had a president who has served for two terms and been successful in dealing with internal security issues and encouraging foreign investment. Turning to Eastern Europe, Russia marches to its own beat but the credit crunch was a real wake-up call.
Now, when I meet big Russian companies, they are much more focused on generating shareholder returns. The Russian government knows it needs to make some big investments and, to do so, it needs foreign help.
To what extent are emerging markets still driven by capital flows from external investors?
DN: Something very important has happened in emerging markets. If we go back to late 2008 and early 2009, we had a big shock to the global financial and economic system – some would say the biggest shock in more than 70 years. Yet the emerging markets bounced back hard – not just the stock markets but the economies and companies too.
A decade ago, that adjustment would have taken three years at least to happen. The shake-out has served to highlight emerging markets’ strength – government finances are good, debt levels are low, economic management has been sound and that stands in stark contrast to the developed world.
How will the sovereign debt crisis affect Asia?
SP: Sovereign debt in Asia is not really the issue so much as sovereign debt in the developed world. Sovereign debt spreads for a lot of Asian countries have been coming down compared to those of the US – and quite rightly, because, if you look how Asian economies are set up, there is less debt and better growth.
That’s a very powerful combination and you should pay up for that. We will have short-term blips in markets when people worry about sovereign debt in other parts of the world, but I do not think Asia itself will be the cause of problems.
Is the crisis an issue for the emerging markets?
DN: Only insofar as it introduces short-term volatility. In Latin America, the debt dynamics, government finances and economic backdrop are far stronger than in the places having the
problems.
If we look at emerging Europe then yes, some countries, at face value, are not in as strong a position as Latin America but, even so, the size of the debt issue is much lower than in the developed world.
If you add together the Czech Republic, Hungary, Poland, Slovakia plus a few others, you reach pretty much the same government debt as Greece by itself – and that is a quarter of Italy’s level.
Also Hungary, one of the countries people point to in this regard, is already two years into an austerity programme. That is the harsh medicine other countries are just about to face.
This article first appeared on www.marketing-hub.co.uk
