A structural shift in the global balance of economic power is occurring as industrialising emerging markets account for an ever larger proportion of global growth and this is being exacerbated by macroeconomic and financial stress in the developed world.
Inherent strength
Asia’s recent economic performance stands out from all other major regions. In 2009, Asia experienced a more modest slowdown when economies in the west went into a credit-inspired recession. And remarkably, GDP growth stayed above 6%. Regional economic growth then picked up strongly in 2010 and, most importantly from an investment perspective, Asia’s growth is forecast to stay strong – above 7% in 2011 and 2012, according to Goldman Sachs. This supports a strong outlook for corporate earnings and share prices.
The resilience of Asia during the global financial crisis lends weight to the notion that the region is genuinely decoupling from an over-reliance on western demand. While exports to developed markets still matter a great deal to economies such as China, the key point is that they matter less than they used to. The reason for this is that many Asian economies have reached a stage of economic development where they are seeing a gradual structural rebalancing towards domestic demand. In short, more and more people in these countries are beginning to be able to afford to buy for themselves what they once produced for others in more developed countries.
While the evidence of macroeconomic decoupling is becoming very strong indeed, cynics point out that in times of heightened volatility and risk aversion, emerging and particularly Asian stock markets offer little protection from the macro fears surrounding growth in developed markets. One fundamental explanation for the highly correlated recent performance is that Asia ex- Japan is still significantly driven by exports to the developed world and any reassessment of developed world growth has an impact on the region.
Emotional investing
An equally persuasive explanation is that, for brief periods, the markets are simply not driven by an assessment of the differing fundamentals of the respective areas but instead by emotion. When fear levels surge among investors, they tend to act indiscriminately by selling all risk assets to seek safe havens such as gold and the highest quality government bonds. This risk on/risk off nature of investor behaviour (which has been pronounced in the past several years) means that emerging and especially Asia ex- Japan markets have not decoupled in the very short term.
However, despite periods of acute risk aversion where all stock markets are briefly treated in a like-minded manner, the weight of evidence is considerable that emerging economies and stock markets are decoupling over longer periods of time when markets are less influenced by risk sentiment and more by fundamentals.
The underlying shift in the balance of power between fast-growth emerging markets and low-growth developed economies has certainly been recognised and rewarded in stock markets over the past five, ten or 15 years. So, while Asian markets have performed poorly in the context of recent indiscriminate risk aversion, both history and a better economic growth outlook, indicate that this is unlikely to last.
