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Asia Intel Q & A
Asia’s Spending Spree Will Save Investors amid Worldwide Economic Gloom: A Conversation with STEVE SENEQUE
Date published: May 27, 2009
Asia’s Spending Spree Will Save Investors amid Worldwide Economic Gloom: A Conversation with STEVE SENEQUE
By Neha Kumar
Amid all the economic gloom, there’s a silver lining: the spend thrift Asia. The region is not only likely to get a boost from its consumers, but also the spending spree habits of the governments. The support from the recently announced economic stimulus measures by China, Japan and others would lay the foundation for more sustainable growth in Asia in the near future. While the current economic growth rate may have slowed compared to previous years, the region remains a relatively bright spot in an otherwise shattered global economy. However, experts including Steve Seneque, Chief Investment Officer and Co-Head of Funds-of-Funds at SPARX International (Hong Kong) Limited, say that Asia needs to increase domestic consumer spending and shift its focus from exports to domestic needs to emerge as a real winner and be investors’ favourite investing spot.
1) Can Asian economies sufficiently boost domestic demand to compensate for the fall in export revenues as an engine for GDP growth?
Asian economies are mostly geared towards exports. The region now needs a rebalancing whereby domestic demand takes over as the main driver for growth. However, because of Asia’s current growth model that is export-dependent and its reliance on mercantile policy (regulated and enforced policies by the state to ensure favorable balance of trade), domestic demand may not be enough to compensate for the huge decline in the export activity. Besides, for most of these Asian economies, consumer spending doesn’t account for a huge component of the GDP, making it difficult for them to totally depend on demand from home. While it is hard to insulate Asia from the rest of the world, government spending in the region would help stimulate growth to some extent. However, we still need to see how much impact it would eventually have. Additionally, aggressive bank lending could help bridge the shortfall of export demand, but we haven’t seen enough of that happening so far. We know for a fact that loan growth and credit growth are untapped in some parts of Asia, especially in China, where people mainly buy through cash. However, China realizes that and is trying to address the issue. For example, through its mortgage pilot programs, the government is trying to make loans more accessible for China's 730 million farmers by exploring ways to recognize land ownership rights for them.
2) How effective will various fiscal stimulus packages be?
For most Asian countries, the fiscal stimulus packages, if used efficiently, will prove quite effective. The Asian banking system is not broken and still remains healthy. Since the region as a whole has not seen the same financial sector dislocations as elsewhere, fiscal spending should prove relatively more effective. The focus of these packages is more on boosting domestic consumption rather than external demand. Countries like China need sustainable development (energy, water and sanitation) and infrastructure, and the government intends to spend a decent amount of money in those areas. China also needs to spend a fair amount in healthcare and education, and it’s good to note that it has realized that. Similarly, Japan also has plans to spend money to boost its domestic consumer spending through tax cuts and other means.
Since Asian banks and corporate sector in general are in better shape, it makes it easier for the governments to focus their sources on other things to stimulate economic growth.
3) Is a double digit growth for Chindia, the two fastest growing economies in the world, a far-fledged dream? Will the rest of the Asia be sliding into a recession?
We don’t expect Asia's economies to accelerate anytime soon as the Asian growth model has been about globalization and trade. However, it is worth noting that while other major economies are already in a recession, some parts of Asia are still exhibiting growth. On balance, Asia should still be a bright spot in a world suffering from an economic slowdown. The effects of government stimulus packages, lower interest rates, falling commodity prices (which acts as a huge tax cut for Asia) and the emerging middle-class should help the region in the coming years. We are still hopeful on Asian markets given the level of population and greater ability of consumption as household incomes increase.
4) Which Asian countries are most vulnerable to the global economic slowdown?
The small open economies of Asia, which includes nations such as Singapore, Malaysia, Taiwan and Korea, are probably the most vulnerable under the current severe economic environment. However, it is our view that China’s fiscal spending plans might offer some relief to its Asian neighbors.
5) Are the policy responses by Asian countries appropriate?
The policy response in Asia, as well as in the rest of the world, has been very timely and encouraging. We will find out the exact effect this will ultimately have on growth and financial stability in the coming months, but it’s encouraging to see that the governments are responding to the current crisis. The fiscal and monetary steps announced by various Asian governments are already bringing a certain level of confidence in the market, as exhibited through the recent uptick in the equity markets, and will hopefully help lift the sentiment further.
6) What’s the general mood in the Asian market and how much more deleveraging by investors from Asian stock markets is yet to be done?
There was a huge retrenchment in the region since Lehman Brother’s collapse in September last year. We saw a lot of deleveraging especially in countries like India, which relies heavily on foreign capital. Since we are not yet convinced that the markets have bottomed out, there may be more outflow of capital. It is worth noting that the investors worldwide are still in a capital preservation mode as they wait for the dust to settle from the financial crisis fallout and perhaps look for signs that recession concerns have abated and companies earnings have bottomed. Therefore, we believe that the recent rally in the global markets may be indicative of a short-term rebound, rather than a prolonged turnaround. However, for the remaining capital outflows, most Asian governments are still in a comfortable position to absorb these. Moreover, there is plenty of liquidity in the Asian financial markets and we will see more of it once the economic outlook stabilizes.
7) What are the biggest challenges faced by China?
China is very capital intensive and creating jobs has always been a priority for its government. The unemployment rate is rising across the region, driven by a decline in export demand, and that remains more of a challenge for China. We believe that China is certainly in a position to do more if such challenges persist. Our view is that China would do whatever it takes to maintain social stability in the country. In other words, if the government feels that it needs to do more to create jobs or spend more on health and education, it will. The recently proposed stimulus package should help create jobs in the country and stimulate not only the domestic economy but also prove to be beneficial to other economies across the region.
8) When things do turnaround for the world economy, is inflation a worry for Asia?
There is a huge noise in the market about inflation because of the stimulus measures provided by the governments. However, it should not be a major concern just yet because deflation is a bigger concern right now given the sheer buildup in unutilized capacity. We believe that if the government can take steps to fight deflation, it can also do a lot to tackle the inflationary forces by raising interest rates, increasing taxes and via other means when the situation arises. Not only that, we suspect that central banks will become more proactive if needed; just as they injected liquidity in the market, they should also be able to withdraw it through open market operations when the need arises. If anything, the market should be more worried about deflation in the short-term rather than inflation in coming years.
This report has been prepared by SPARX international (Hong Kong) Limited (“SPARX”), for informational purposes only to professional investors who are expected to make their own investment decisions without undue reliance on this report. The views and strategies described may not be suitable for all investors. Under no circumstances is it to be used or considered as investment advice, a recommendation to buy, an offer to sell, or a solicitation of an offer to buy or sell securities. We accept no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The information is intended solely to report on investment strategies and opportunities identified by SPARX. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. SPARX and its affiliates do not warrant the accuracy or completeness of any of the information or data contained herein. References to specific securities and their issuers are for illustrative purpose only and are not intended to be, and should not be interpreted as investment advice or, a recommendation, offer or solicitation for the purpose or sale of any financial investment. This report does not constitute tax advice and as such investors should be advised to consult their own tax advisers regarding the tax consequences of their investment activities. Investment return and principal will fluctuate, so that a client’s initial investment may increase or decrease. Investing in securities markets involve risks like those arising from stock and bond markets, currency exchanges rate and interest rate volatility. No part of this material may, without SPARX prior written consent be copied, reproduced or published by any recipient for any purpose. Past performance is not indicative of future performance.
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