1. Art and Diseño

M o n t h l y m a r k e t C O M M ENTARY
Asia Market Watch
January 2015
Written by:
Markus Schomer, CFA
Managing Director,
Chief Economist
PineBridge Investments, New York
Two major trends are reshaping the global
economic outlook. One is the sharp drop in
oil prices. Since last summer the price of a
barrel of Brent crude has fallen more than
55% compared to its fairly steady average
of the previous 18 months. The result is a
serious redistribution of purchasing power
away from oil producers who are typically
net savers to oil consumers who are more
likely to spend the additional income. Asia
looks like the biggest winner. In 2013 the
region consumed almost four times as much
oil as it produced. Hence, the positive impact
on consumption should greatly outweigh any
negative impact on mining investment.
The second effect is the dramatic swing
in global currency markets. The euro’s
weakness increased significantly in January
after the European Central Bank’s decision
to start a large scale asset-purchase
program. The Bank of Japan is already
mulling yet another increase in Quantitative
Easing (QE), which is keeping the yen weak.
However, attempts to stimulate growth
through weaker currencies always produces
losers on the other side. Many of those are in
the rest of Asia. China’s US dollar peg is now
tying its slowing economy to the improving
trajectory the US is on. The renminbi is up
17% in the past six months. Other currencies
have experience similar appreciation. Hong
Kong’s dollar is up 18%, Taiwan up 13% and
South Korea up 12%.
Against the broader trend, Asian currencies
actually had a fairly good January. Japan’s
yen and the Indian rupee gained about 1.5%
and 2.5%, respectively. South Korea and
Taiwan also posted stronger currencies.
Asian equity markets also had a good start
to the year. Most of the developed Asian
markets were up between 1% and 2%,
except Hong Kong were stocks surged
about 5% in January. Markets in India
and China were up even more, adding to
the bullish trend. Asian sovereign bonds
also delivered positive returns in January,
though the region underperformed the JP
Morgan Global Diversified EM Bond Index.
We continue to look for evidence of
a rebound in Japan after last April’s
Consumption Tax increase pushed the
economy into the fourth recession since
2008. I guess that would be a ‘QuadrupleDip’. Japan’s All Industry Activity Index,
a monthly GDP proxy, started to grow
again in September, but showed no
improvement in momentum during
October and November. Purchasing
Managers Indices are back above 50 – yet
only barely so – adding to the perception
that the recession may be ending, but the
recovery lacks impetus .
One area where we see a more significant
improvement is trade. Exports have
increased notably in the past few months,
growing at an annualized rate of 18% in
the third and 25% in the fourth quarter.
However inefficient QE is as a policy tool
to boost domestic economic activity – or
inflation for that matter – it did reverse
the post-2008 yen strength that had
driven Japan’s trade-weighted effective
exchange rate to a new all-time high.
Hence, we expect growth to rebound
in Japan, reaching 1.7% in 2015 after a
disappointing 0.2% last year.
Latest data showed China’s economy grew
7.3% from a year ago in the fourth quarter,
the same rate as in the previous period.
Yet, headlines focused on the growth
rate for the entire year, which at 7.4%
was the weakest in 24 years, though only
by a few tenths. Looking ahead, China is
one of the main beneficiaries of the steep
decline in oil prices. It posts the biggest
consumption/production surplus of all
the major Asian economies. China’s two
manufacturing PMI indices deteriorated
in December, slipping just below the
critical 50 threshold. While it seems
broader manufacturing activity remains
stagnant, the trend in retail sales and
industrial production improved towards
the end of the year suggesting the recent
growth momentum may carry over into the
current year.
In early January, the IMF downgraded
growth expectations for China by -0.3%
to 6.8% this year and by -0.5% to 6.3% in
2016. The fund acknowledged the positive
effect of lower oil prices, which on its own
should lift Chinese GDP growth this year
between 0.4% and 0.7%. However, the fund
believes that impact is overwhelmed by
weaker investment spending. So without
the drop in oil prices, would growth
forecast have fallen by a full percentage
point to 6.3% this year? We believe that
assessment is too bearish and does not
take into account further monetary policy
support and stronger export demand. In
our latest projections, we expect China to
grow 7.1% this year and 7% in 2016.
Weaker growth trends dominate other
developed Asian economies. Taiwan’s
manufacturing PMI index fell to the
expansion/contraction threshold of 50 in
December. Industrial production stagnated
in the fourth quarter, highlighting the
loss of momentum after stronger growth
over the summer. Manufacturing is in
a similar slump in Hong Kong. After a
tentative rebound in the first half of 2014,
production declined again in the third
quarter and a PMI index averaging 49
in the fourth quarter suggests growth
remained weak at year-end. Singapore
reported fourth quarter GDP growth
easing to an annual rate of 1.5%, the
slowest pace in more than two years.
Consistent with weaker growth trends
among its peers, the main driver was a
contraction in manufacturing and a sharp
slowdown in construction.
Part of the sluggish growth momentum
in the heavily export-oriented developed
Asian economies is the weakness in global
trade. The World Trade Organization (WTO)
pinebridge.com
expects merchandise trade to grow 4%
this year. That is up from an even weaker
3.1% last year, but well below the 5% long
term average. Another likely reason is
currency appreciation versus the yen and
euro. While Japanese shipments overseas
accelerated strongly in the fourth quarter,
Taiwan, Singapore and Hong Kong saw a
contraction in exports during the same
period. If this trend continues, pressure
on local central banks could increase to
match the policy easing in Japan and the
Eurozone if circumstances allow.
It is not just China that benefits from
lower oil prices. India, Asia’s second
largest economy, is another major net oil
consumer. In China, a boost to consumer
spending could help slow the pace of
the growth slowdown. In India, lower oil
prices are boosting an already improving
recovery. India’s manufacturing PMI index
improved to 54.5 in December, significantly
above the global and regional averages.
Not only will lower oil prices boost
consumer spending, they will also slow
inflation. That trend is already evident
in India, where consumer price inflation
slowed from 8% last July to just 5%
in December.
That drop is well ahead of the central
bank’s target of 6% by the end of the year.
Not surprisingly, the bank took advantage
of the favorable inflation trajectory.
Against expectation, the Reserve Bank
cut rates in January, reversing the first
of the three rate hikes forced on it in
2013 during the Fragile Five crisis. The
IMF also downgraded its India growth
forecasts for this year, though just by
-0.1%. Nevertheless, I wonder how the
fund justifies its more bearish outlook as
lower oil prices, easier monetary policy
and stronger real income growth are all
new factors that were not part of the IMF’s
World Economic Outlook last October. We
expect India to grow 5.8% this year and
6.2% in 2016.
Looking ahead, there are multiple macro
trend we are keeping an eye on. Japan’s
economy should post positive growth
in the fourth quarter, ending its fourth
recession since 2008. We have not seen
any improvements in China’s preliminary
PMI surveys. Yet lower oil prices should
boost retail sales at the start of the first
quarter, a tentative sign that the economy
may be able to maintain a stronger-thanexpected growth momentum. Finally,
further weakness in industrial activity
and exports could trigger a new round
of monetary policy easing, especially in
South Korea and Taiwan. That would heat
up the currency competition with Japan
and the Eurozone.
Written on 29 January 2015
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16 June 2014