When we compare the growth prospects for the Asian region against either Europe or the US, the struc...
When we compare the growth prospects for the Asian region against either Europe or the US, the structural advantages are compelling, and a benign outlook for the pace of growth in China reaffirms our decision to favour the vibrant Eastern economies over the developed West.
We are convinced the Chinese authorities have achieved their desired level of slowdown from the boom experienced at the beginning of the year. Food prices seem to have peaked with the help of a better harvest, and should decline month-on-month through the balance of the year.
This was the only area of the economy showing significant inflationary pressure, and elsewhere overheating was almost exclusively a result of lack of infrastructure, be it in railways, ports or electricity generation.
This infrastructure still needs to be expanded, but in the meantime, the authorities do not want resources sidetracked into uncoordinated regional industrial developments.
During the autumn, we expect confirmation that economic growth in China is still cruising along at 8% to 9% a year. As a result, exports to China from the rest of Asia should remain robust, both for capital goods and for raw materials.
Longer term, there will have to be a major realignment of their currencies against the West, but none of the smaller countries can afford to do this ahead of China, where we expect no action at all until the second half of next year.
In the meantime, they will need to recycle their US dollar earnings into their domestic economies, so effectively monetary policy will continue to be very loose. In the case of Korea, the authorities have even managed to cut interest rates.
This should stimulate consumer demand across the region. Over time, Asian consumers will gradually replace US consumers as the main stimulus to world trade, and this is also reflected in our sector positioning.
In the meantime, looking at the valuation of Asian companies relative to their Western counterparts, most still trade at a significant discount in spite of considerably better growth prospects.
We believe this anomaly will be the decisive trading opportunity for investors over the next few years.
Our portfolios are still relatively defensively positioned within Asia, favouring markets such as Singapore and Malaysia, but as evidence of the resumption of export growth to China begins to come through again, we are likely to add to export focused markets such as Korea and Taiwan.
The individual companies we favour are those with strong balance sheets and a focus on free cashflow generation, with what we believe is the potential for a positive earnings surprise in the months ahead.
Pace of growth in China set to pick up again.
This will benefit rest of Asia, especially exporters.
Share price valuations remain attractive.
Progress dependent on growth in China and US.
Currency realignment likely, led by China
Markets remain volatile and subject to investor sentiment.