Australia still the “lucky country”, says Newton’s Jason Pidcock

Jason Pidcock, manager of the Newton Asia Income Fund, believes Australia remains one of the brightest prospects in the Asia-Pacific region.

It is important to consider both global and Asian factors when considering Asian equities. Factors external to the region have had a considerable impact on markets in the region in recent years as correlation between markets has been relatively high with investors moving between “risk-on” and “risk-off” periods in unison.

We believe the two most important external factors are the ongoing crisis in Europe and the US recovery.

In recent months, investors have become slightly more comfortable with the situation in Europe; however, we do not believe that the recent long-term deficit reduction plan in the EU is sufficient to solve the deep-rooted problems of over indebtedness and lack of competitiveness, and therefore expect these issues to dampen markets for some time. It also remains to be seen how a full default, or exit from the euro, by Greece or anyone else might be taken by markets.

Recent economic data in the US has been more positive, which is encouraging for exports from Asia as well as for global economic growth. However, this improvement is still minor, which is highlighted by the fact that the US Federal Reserve has committed to near-zero interest rates until at least 2014. Continued loose monetary policy in the US is beneficial for Asia for a number of reasons, not least because it will mean a weaker US dollar than otherwise which, historically, has been positive for emerging market equities.

Renewed tensions in the Middle East could also prove problematic. If Iran retaliates to sanctions imposed upon it by the US and EU, either by closing the Straits of Hormuz as threatened or in some other way, it could cause the oil price to spike dramatically and have a destabilising effect on global economic growth.

Meanwhile, the most important internal factor in Asia is the outlook for China.

Following the massive stimulus in 2009 and 2010, China now has less ability to manufacture growth than previously. Nonetheless, policymakers still have considerable tools at their disposal and have, to date, had remarkable influence on the economy’s path, in our view. Looking ahead, we expect the authorities to selectively ease monetary policy when necessary such that growth in 2012 will be lower but not drastically so. Longer term, we are less positive due to structural concerns of over-investment, lack of sustainable profitability and a dysfunctional banking sector. These problems will probably start to manifest more materially when economic growth slows, more so than market participants are expecting.

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