Why have global markets fallen along with China and Asian currencies weakened following the RMB devaluation?
Andrew Gillan: Stock markets fell because the rest of the world has been pinning their hopes on strong Chinese consumption. Generally, a weaker RMB is seen as a negative for Asian companies and stock markets. The Chinese economy is in transition but clearly consumption growth is not growing enough to replace the prior contribution from investment.
Regional currencies have weakened for different reasons. The Australian dollar has weakened because of the fall in commodity prices linked to weaker Chinese demand, while for some ASEAN (Association of Southeast Asian Nations) currencies it is because of weaker current account/fiscal positions, which are generally linked to lower oil/commodity prices. Asia is seen by many as at risk from the first rise in US interest rates – ie expectations of money leaving the region in favour of the US.
How have your portfolios been impacted by the move?
Andrew Gillan: We are in a challenging environment as ASEAN, along with the more export-driven markets of North Asia, Taiwan and Korea, are under pressure. In particular, the technology sector has sold-off.
While we do not write off markets completely, within our Asian Growth portfolios we reduced exposure to Indonesia and Thailand a few months ago. We have had no exposure to Malaysia over the past year and we remain overweight India.
Have your expectations for Asian equities for the remainder of the year changed?
Andrew Gillan: We think Asian markets will remain under pressure in the short term, but we should see a reversal at some point as stock valuations offer support for a recovery. Global markets have been artificially inflated by quantitative easing (US, Europe, Japan), and although Asia has not had the same amount of stimulus, it is seen as weaker. Importantly, this provides us with investment opportunities as some well-run companies with good growth prospects have also seen their share prices fall because the market sell-off has been fairly indiscriminate.
