Divergence to the fore - China and India on new paths

GROWTH is starting to stabilise in Asia, and we believe this stability should last for cyclical and structural reasons. Cyclically, we see signs of policy easing, with interest rates coming down now that inflation is less of a concern and asset prices in general having fallen. Lower commodity prices will also be helpful for Asia's inflation picture, as well as its current account deficits, given it is a net importer of most materials. In addition, exports have improved, particularly in the last six months, with global recovery seemingly more entrenched.

The bigger issue is what's happening from the structural perspective, notably in terms of reform. Reform has started to roll out across the whole of Asia, starting from China, but from the second quarter onwards we've also seen new regional governments such as those of India and Indonesia take on a fairly aggressive new path. Take for instance Indonesia, where we've finally seen the diesel price rise after many years of subsidies.

We believe that while these changes may have a negative effect in the short term, this will create a long-term opportunity for flexible, pragmatic investors in Asian equities. For instance, the long sought after crackdown on corruption is putting some downward pressure on growth, particularly in China, but also creating a more solid platform for higher quality growth going forward and, ultimately, better equity returns.