SWIP’s Mike McNaught-Davis reviews the arguments in favour of Asia
Since US shoppers have been forced to tighten their belts, the scouts are out for a new group of consumers to fill the global spending void. Asia’s new bourgeoisie seem to fit the bill.
Eastern and Western lifestyles, long subject to both cultural and economic divides, are beginning to converge.
And from an investor’s point of view, the emergence of a relatively affluent Asian middle class with spending power is a beguiling idea.
China’s populace, in particular, is keen to flaunt its new-found wealth. Wages are rising faster than ever and employees are rushing to spend them on luxury goods, as well as recreation and housing.
But what if this unaccustomed largesse is not Asia’s only recent Western import? The market turmoil over the last few months has intensified fears that the problems in the European financial sector and slowing growth in Western economies could start to creep east.
And a recession in Europe and/or the US, with a resulting drop in demand would, inevitably, have some effect on Asia’s export-led economies. Equity markets in the region would likely come under some more pressure.
Meanwhile, some Asian countries have home-grown trouble in the shape of burgeoning inflation.
Rapid economic growth and rising input costs have sent prices onto an upward course.
As a percentage of spending habits, outlay for commodities tends to be higher for consumers and companies in Asia, relative to the West.
To date, however, the authorities seem to be on top of the situation and it appears that inflation is close to its peak.
Certainly, the Chinese government has been very alert to the dangers of inflation; so far, measures to dampen it have included a clampdown on bank lending, interest rate increases and higher reserve requirement ratios.
It is important not to forget that regional Asian equities have several points in their favour. Valuations are currently attractive and dividend yields are solid.
Historically, the latter was not always the case, but there has been a stronger focus on shareholder return in recent years. Corporate balance sheets are also in good health.
Emerging Asian economies have a distinct lack of some of the problems inherent in the West.
The banking system has so far managed to dodge the worst of the effects of the global financial crisis.
Industries in the region are yet to reach maturity, and as such, are hungry for growth.
A workforce that is still comparatively inexpensive will help to make this happen.
Relatively speaking, then, the outlook for Asia is bright.
Mike McNaught-Davis is head of international equities at SWIP