We believe emerging Asia is at a turning point. The region has faced strong headwinds in recent years, but we now see a number of tailwinds gathering momentum.
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One prime example is the rebound last month of nominal growth in…China’s gross domestic product (GDP) reflected in producer prices turning positive year over year for the first time in nearly five years…as reflected in the chart below. We see this reflationary shift taking hold as growth in China stabilizes. This should support emerging market (EM) Asia, as business cycles and market returns there are increasingly correlated with those in China.
[In addition, there are] many under-appreciated tailwinds:
- Reflation across EM Asia is reflected in improving corporate profits. The shift away from the steep earnings downgrades of years past is evident in the chart above.
- EM Asia currencies have also stabilized this year,
- the region has relatively high credit ratings among EMs
- and, finally, strong macro fundamentals and demographics support the region’s improved economic outlook.
Investors are tiptoeing back into the region: Foreigners have bought a net $13 billion of regional bonds this year and appear to be returning to equities, EPFR Global data show. They likely have room to increase allocations: $71 billion has left Asia ex-Japan bonds and stocks since the mid-2013 “taper tantrum” set off by the Federal Reserve signaling an end to bond purchases. We don’t expect a tantrum replay, as we see the Fed raising rates gradually, plus, EM Asia appears in better shape now than in 2013.
We do see policy-related risks to China’s growth such as new property curbs. EM Asia also faces the potential challenges of renewed U.S. dollar strength, U.S. protectionism post-election and geopolitical crises.
Overall, we see compelling reasons to invest selectively in EM Asia long term. We favor assets in Indonesia and India. Rate cuts in Indonesia support more corporate investment and consumer spending, while India has implemented key reforms to its tax system and bankruptcy code.
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