One big cloud hangs over the region: the mess in Europe, and to a lesser extent the political paralysis in the US that has led to the ‘fiscal cliff’.
When faced with its own financial crisis 15 years ago, Asia was prescribed – and took – tough medicine. In comparison, the
West, especially Europe, has shown no such resolve.
Weaker demand from these advanced economies has dampened Asia’s exporters. GDP forecasts are being notched down accordingly.
China is another big concern. Topline figures are still phenomenal (the economy expanded by 7.6% in the second quarter), but growth has been decelerating.
True picture
From our conversations with managements, the true picture, I suspect, is a lot weaker. Can policymakers deal with the slowdown? Yes, in many ways they can.
The government has very deep pockets and it does act cohesively and decisively. China’s prospects may not be rosy, but it is not going to be an out-and-out economic disaster.
The same cannot be said of India, the other Asian giant. Investors have been deterred by its dismal politics and growth is slipping. We have seen leading businessmen take the government of Manmohan Singh to task, and rightly so. But I am not sure things will change in a hurry.
Short term, I would still be cautious; the country is unlikely to see great growth in such a divisive political climate. Having said that, India’s potential on a five to ten-year view (which is how we invest) is still huge. And underneath all the politics, companies have remained vibrant.
Sanguine approach
Against this backdrop, we are not expecting fantastic earnings growth from the region over the next year or two. We are still fairly sanguine, though. Earnings should continue to increase, albeit at a more modest pace; our forecast is for single-digit growth.
The main reason for our confidence is the strength of Asia’s balance sheets at the government, corporate and household levels.
Asia does not face the systemic debt woes of the West. On the contrary, the region is in a strong financial position. Companies are experiencing pressures but remain in excellent shape on the whole.
In aggregate, Asian corporates have a low net debt-to-equity ratio of less than 30%. That means companies have room to invest in the near term, and have exceptional scope to grow earnings in the longer run.
