Asia has benefited in recent years from favourable growth relative to other regions and strong capital inflows. The latter has been driven by the implementation of ultra-loose monetary policies in developed economies. Now that plans are in place to slowly withdraw that stimulus, some market commentators are asking if certain Asian economies could be victims of the West's reforms and policies.
The US Federal Reserve's talk of tapering its asset purchase programme has caused some pain and asset price adjustment across the region. Certain smaller market constituents within the MSCI Asia Pacific ex-Japan Index, such as India and Indonesia, which have weak currencies and underlying economic issues, fell significantly following the Fed's announcement and have seen some foreign investment repatriated. However, the withdrawal of liquidity and the fact that developed markets are starting to ‘normalise' will lead to a greater emphasis on growth. From an income perspective, this is where Asia has an advantage.
Structural change
We believe that growth in Asia is much more sustainable than in the West because it is based on structural development. The Institute of International Finance (IIF) predicts growth in Emerging Asia is likely to remain at around seven per cent in both 2013 and 2014, which compares favourably with the one to two per cent growth the IIF expects for developed economies. The region has already gone through a significant amount of change following the 1997 Asian financial crisis. Since then, companies have been much more rational with their investments and many now sit with net cash on their balance sheets, providing potential for further shareholder-benefits.
China's still growing
From a country perspective, China offers the best combination of value and income growth in the region. Despite Chinese economic output losing some momentum during the first half of the year the country is still expected to achieve its 7.5 per cent growth target for 2013. Supportive manufacturing, services and export data released over the summer suggests China's economy is showing signs of a recovery stimulated by a policy shift towards domestic consumption.
Middle-class structural growth is what underpins Asian domestic demand, and should also mean the region is better placed to withstand external shocks. As Asian consumers in developing countries move up the income ladder, a desire to raise living standards is leading to greater consumption of higher-quality goods and services. According to the Brookings Institution, Asia will be home to three billion middle class people by 2030, ten times more than North America's middle class. This would be 64 per cent of the expected global middle-class population, accounting for over 40 per cent of global middle-class consumption.
Putting savings to use
Moreover, rising levels of wealth have led to Asian consumers hoarding a huge pool of bank deposit savings. For example, the amount local investors in China have saved is equivalent to US$16 trillion or 192 per cent of the country's gross domestic product (GDP). Therefore, the potential for investors across the region to mobilise their savings into higher yielding assets, such as equities, is huge.
Infrastructure enhancements are also being implemented due to demands for better standards of living and governments laying the foundations for further foreign investment and business development. Rather than being victimised, the rebalancing of the global economy may actually be going in Asia's favour.
Mike Kerley is Manager of the Henderson Asian Dividend Income Unit Trust
