You might not think it from the correction in equity markets in recent weeks, but David Urquart says economic data from the start of the year suggests that the global recovery is becoming increasingly well entrenched, at least in Asia.
Economic growth surpassed expectations in most countries across South East Asia late last year and early this year and, amid a broad based improvement in both external and internal demand, we are already seeing upward revisions to first quarter data.
The improving picture has already led China to take steps to reign back price appreciation in its property market by increasing the reserve requirement for banks on several occasions and Malaysia has also raised interest rates sooner than expected – as did Australia.
Of course, while all of this has been going on, the troubles facing the eurozone have also unnerved investors, as have proposals to tighten regulation of the financial sector. Now we have rising tensions in the Korean peninsula encouraging investors to exit risk assets.
But while there will be volatility in markets as these events work their way towards a conclusion, the fact remains that the secular growth trends seen across South East Asia should keep the region on a healthy growth path.
Today’s volatility can create a good opportunity to become involved in the long-term growth stories to be found across South East Asia, growth opportunities that have led the region to command a greater proportion of global GDP.
Share of global GDP
Source: International Monetary Fund, World Economic Outlook Database, October 2009
Infrastructure investment is one of those major long term themes worth exploring. The development of new infrastructure is necessary as the region grows if it is to sustain its rate of expansion. For example, China needs to invest more in its railways and highways as 350 million people migrate to its cities over the next two decades. A massive rail and highway network is being built to connect the cities to rural areas. Installed power capacity in terms of megawatts per person is also very low in China, as it is in other emerging Asian countries. There are many large scale projects underway to build new power plants across the South East Asian region.
This investment in infrastructure not only adds to current demand for capital goods but, in turn, fuels job creation, increases household incomes and, ultimately, boosts consumption. In addition, healthy population growth, together with low household debt levels and high savings rates, also highlight the potential that remains to tap into a new consumer boom.
There is still much wealth creation taking place across the growing middle class in the region but, further down the income scale, most of Beijing’s consumer stimulus plans have also carried into this year, with focus likely to remain on raising household incomes and boosting consumption. The benefits of this will spill over into other countries in the region, like Taiwan, Korea, Hong Kong and Indonesia, which all export to China.
Among all the volatility at present, investors should not ignore the fact that there is much disparity in the region. Before the recent correction, some sectors and stocks had rallied strongly while others had lagged. As a result, stock selection is likely to be more important this year than last. Choosing the right stocks can offer a rich investment opportunity as Asia’s economic fundamentals remain stronger than those found elsewhere in the world.
David Urquart is portfolio manager of the Fidelity Asia Fund
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