Asia may be doing better relative to the rest of the world but it is suffering relative to its own history. Export growth has been weak and boosting domestic growth is difficult without generating excess debt or inflation. In this era of low global growth, some have faced the new reality by implementing reforms to generate future growth. China is the clear leader followed by lesser extent, India and Japan. Taking this path means Asia will continue to slow to pay for the price of reform but makes us more optimistic 2-3 years down the line.
From markets perspective, Asian currencies will continue to weaken versus USD, as relative growth and monetary policy changes favors US. Asian currencies will only get stronger until we see exports recover, which is a precursor to inflation. Equity market remains the main winner from Asian central banks bias to loosen monetary policy further. Bond yields should head lower, especially in the short end.
Indonesia remains a waiting game. Optimism will have to be curtailed until we see some progress and implementation. We are focusing on two signals to turn positive: first, commodity price recovery or second, short term pain to push down inflation like India did in late 2013.
Top 3 Investment Ideas for 2015:
1) Buy China equity – Chinese stocks are correcting. Valuation is one of the highest in Asia but compared to historical valuation, it can march much higher from present levels.
2) Sell Thailand – “The economy will not normalise long term until elections are held that reduces political risk. Until the political system is resolved, long term economic growth will be difficult.
3) India outperforms – “Equity market should continue to do well with monetary easing and economic recovery. The flows are also healthy where we see both foreign and domestic interest pushing up the equity market, although in the recent month foreign enthusiasm has slowed.
Sean Yakota is head of Asia strategy at SEB