Can global liquidity continue in Asia? Invesco’s Stuart Parks comments

Stuart Parks, head of Asian Equities at Invesco Perpetual, provides his outlook for Asian equities.

Liquidity environment

Asian equity markets have enjoyed a very supportive global liquidity environment over the last three years as central banks have attempted to support their economies by increasing money supply.

Some of that money has filtered out from developed markets into emerging markets such as Asia, leading to quite good performance over this time period. Can this global liquidity environment continue; and are there negative effects within Asia that now need addressing?

With regard to the global liquidity environment, there has clearly been a big wobble over the last month or so in bond markets, as people have expressed concern about the withdrawal of quantitative easing in the US.

We believe that as the economic recovery gains traction, the Federal Reserve is likely to gradually withdraw the punchbowl. However, just talking about it has had a major impact on bond yields. What does this tell us?

With US mortgage rates going up and overall long-bond yields starting to move higher, there is likely to be a negative impact on overall economic activity, and as such the Fed is not going to want to withdraw the punchbowl too early. To our mind, we have probably seen the best of global liquidity conditions, but we do not expect a rapid withdrawal of liquidity.

Signs of overheating – inflation

In Asia, where quite a lot of that money supply has found its way, signs of overheating have started to emerge. However, it hasn’t really manifested itself in rates of inflation.

Chinese inflation rates have remained pretty subdued over the last year or so, largely as overcapacity has made it pretty difficult to raise prices at all. In India, where CPI and WPI inflation rates were well over 10% at some points over the last year or so, inflation has now come down quite rapidly.

Commodity prices in particular have weakened, which is having a very positive impact on inflation levels in India, and as such India is probably the one place where we can expect further interest-rate cuts over the next six to 12 months in Asia.

In terms of the overall rate of inflation in Asia, the picture is much more complicated, and I will talk later about a few of the economies where there are significant inflationary pressures.

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