I am not yet sure the downgrade will have any meaningful impact for Asian economies – it would not be illogical to expect some liquidity flowing Asia’s way and one would expect Asian currencies to strengthen further. But the financial market’s outcome over the past week or so has been a mild strengthening of the dollar against its Asia Pacific (ex renminbi) counterparts, given the flight to the so-called safety of the dollar. Market behaviour meant that, yet again, Asia equity markets could not decouple; shorter-term directional movements were pulling Asia markets down with the rest.
Market hits
The sell-down was brutal. It was not just risk-off, but a rage of forced selling that intensified as the week rolled to an end. Fundamental analysis was rendered irrelevant. The best companies in Asia’s fast growth economies turned into mere numbers to be pummelled in front of a market scoreboard.
Over this short period, Asia economic newsflow was thin; when the July Chinese CPI announced an in-line 6.5% on the morning of 9 August, it was reason enough to help support an intra-day recovery. It was as if equity markets needed a number, any number, to remind themselves Asia is not the US; in fact, the Asia economy has done remarkably well despite the anaemic recovery in the OECD over the past three years.
In addition, Asia’s policymakers have taken advantage of the economic robustness in their respective economies to normalise monetary policy, as well as levelling various draconian measures to curb exuberance in their physical property markets. An optimist squeezing into the frame of a pessimist might see it as policymakers re-arming their toolkit to tackle any potential economic hiccups that may come their way in the future.
Optimistic outlook
My bet (an optimist as always) is that Asia’s inherent growth momentum and its policy levers may allow Asia Pacific ex Japan to outshine OECD economies in the next three years, as the ship of economic catch-up sails its course.
In the three years to 8 August 2011, the MSCI Asia Pacific ex Japan delivered total returns (with dividends) of 16.4% in dollar terms, contrasted with -9.2 % achieved by the MSCI World. This cumulative outperformance widens to 54% when calculated on a five-year basis to 8 August 2011.
History should give us confidence that fundamentals still count over the medium to long term, and periods of a concerted global sell-down such as the one that just prevailed are good opportunities to reposition equity investments towards higher growth economies. Of course, this is provided one is able to identify those higher growth economies and the companies that will benefit.
At the moment, this does not seem a hard call to make. What is tougher, as always, is acting on rational judgement within the midst of market turmoil.
