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AGAINST the backdrop of a new geopolitical age, we saw global growth pick up over the past few quarters and that traction is likely to last through 2017. We are potentially moving from an era of monetary policy influenced markets to one of political intervention. While it is difficult to assess the impact politics will have on the markets at this point in time, we feel that at the margin, reflation is the base case for markets at this point.
While economic improvement is most pronounced in the United States, the macro environment is witnessing green shoots in the eurozone as well. Despite heightened protectionist voices and potential trade barriers, brighter global prospects should have a positive impact on Asia. With China leading the way, we are beginning to see a reversal in trend in Asian growth for the better.
The recent PMI (Purchasing Managers’ Index) data from China suggests that the improvement is broad based, indicating a sustained growth in the economy through 2017. The 2017 National People’s Congress is likely to further the reform agenda in the country with a focus on state-owned enterprises.
The People’s Bank of China has shown dynamism in using policy tools, be it on liquidity or rates, to achieve a balance between managing financial risks to the system while maintaining an environment conducive for long-term growth. While concerns on forex outflows remain, yuan stability seems to be the chosen path and rightfully so. South Korean prospects are clouded to some extent by political uncertainty, while Taiwan may feel a higher level of scrutiny on the trade front. Both economies are likely to register lacklustre growth.
Moving southward, the demonetisation effect in India is yet to fully play out, but early signs show that the economy is more resilient than what was initially estimated. India has seen significant improvement in its current account deficit while fiscal consolidation continues to hold centre stage. With tax reforms likely to bring about efficiencies not priced in, India remains a structural growth story.
Closer to home, South-east Asian economies have benefited from rising commodity prices and are seeing improved domestic strength on the back of the same. While trade data is looking better in Indonesia and Thailand, the Philippines is a stand-out as the demographic dividend is the most pronounced.
Modest growth recovery
In Singapore, we are likely to see a modest growth recovery while some of the negative effects from a slowing property cycle should start to ease as the supply and demand balance begins to correct itself over the next few years.
Inflation is bouncing off the lows in Asia. While we should expect to see higher inflation numbers in 2017, the rise is likely to be moderate due to the negative output gap, base effect on commodities, weak broad money growth and low wage growth.
Interest rates in Asia are likely to track higher for the year on the back of rising US rates. Spreads on the other hand have shown great resilience so far. The Asian hard currency bond markets remain a relevant asset class. We will have to wait a little before we can say the same for local currency exposure.
We are seeing a resurgence in earnings that should augur well for stock markets.
Forward valuations in the early teens are still compelling. Yet a wholesale buy-in to Asian equities remains out of grasp as one struggles to battle the headwinds from policy and politics in the region and abroad. While the dollar looks to keep its strength, the Asian currencies are likely to only marginally lose value from here. In balance, anyone seeking a longer-term exposure to Asian assets might not be far from the buying price.
Financials, the largest sector in the index, possibly has an edge despite the run-up we have seen recently. Technology, the second-largest sector, might see some consolidation. We remain less optimistic about the basic material sector after the recent run-up in prices. In general, owning domestically exposed businesses is our preference. W
Bhaskar Laxminarayan is Chief Investment Officer Asia, Bank Julius Baer