China-centred Asia a dry land refuge

09 April 2014   Category: News, Asia, China, Global   By Hui Ching-hoo

Despite the tapering of US quantitative easing (QE), now well underway, the global market remains swamped with excessive liquidity. Investors are being more cautious in seeking “dry land” on which to park their capital, according to Investec Asset Management.

Michael Power, an investment strategist with the firm, tells Asia Asset Management that this “water world” market condition is expected to linger throughout the year in spite of the continuing slowdown of US monetary easing, aided by with the ripple effect of Japan’s Abenomics measures.

He contends that expectations of a strong US economic rebound are off the mark. He cites ongoing weakness in the retail sales segment in support of his view.

At the same time, restructuring the Japanese economy at the fundamental level has yet to take place, Mr. Power elaborates, given that Abenomics’ first two objectives – massive fiscal stimulus and monetary easing by the Bank of Japan (BOJ) – have failed to achieve any noteworthy success in boosting the country’s current account.

“The real reason behind the “water world” phenomenon is demographic changes. Printing money and relaxing monetary measures are a necessary consequence of an ageing society trying to make up the deficit of its retiring labour force. It’s a trend that is particularly obvious in Japan; but it’s also clear in European countries as well as the US. QE is likely to be a permanent feature of the US monetary policy going forward,” he predicts.

So, returning to his metaphor, Mr. Power identifies the “China-centred Asia” as the widely sought “dry land”. That’s due to its urbanisation, a growing middle class, solid levels of savings and real interest rates.

He adds that the “home bias” of many Asian institutional investors, such as pension funds, is well justified in the sense that 90% of the growth seen in the middle classes will be sourced in Asia over the next 20 years.

“2012 was the first year that foreign investment flows into new markets outstripped those earmarked for developed markets. And Asian emerging markets (EMs) have been one of the most favoured destinations,” Mr. Power says. “Even though emerging markets suffered significant capital outflows last year, the withdrawal was mainly ETF-driven. The region’s underlying sound economic fundamentals meant that the actual impact on Asian EMs was very marginal.”

Citing China as the prime example, the incremental growth of the country’s GDP was nevertheless equivalent to the size of the Australian or Indonesian economies last year, even though China’s economic growth declined to 7.7% from 10% a year earlier. As well, Beijing continues to prise open its capital account through the relaxation of the QFII scheme and the facilitating of offshore RMB bond markets. As for the QDII scheme, Mr. Power reckons that the scheme is no longer sufficient for channelling the domestic capital flow aiming to access foreign markets. Going forward, he says it will be supplemented by other measures such as mutual recognition.