Global investors have been alerted by recent market returns and the possibilities of enormous opportunities which exist in Asian markets, particularly, the Far East and the Asia-pacific region.
The MSCI AC Asia ex-Japan Index has touched new heights since the market bottomed in October 2008.
The strategic long term investment case remains intact. Asia is fundamentally driven by a series of pro-investment environment including strong demographics, rising wages, low debt and high savings – making it prime for strong GDP growth over the next years.
Asian economies will now focus more on domestic growth through investment and consumption, whereas Western consumers rebuild their savings. If there is a pickup in OECD growth, Asian exporters will stand to gain the maximum.
Rapidly growing Asian economies, especially China, have much scope to boost private consumption. There is significant long-term potential for the expansion of domestic demand. High savings rates, rising wages and growth in personal credit are inclining consumers to spend which is evident across range of consumer behaviour.
Asia-ex Japan has relatively low debt levels; particularly consumer debt. This debt burden means the West likely faces an extended period of structurally lower growth due to private sector deleveraging.
Asian companies have stronger balance sheets. Gearing for Asia ex-Japan has fallen during the Asian crisis.
Asian governments have ample foreign exchange reserves, relatively balanced fiscal positions and are able to employ sustainable fiscal packages as counter cyclical tools. If required, they could initiate a second or third round of stimulus. However, Western economies are running fiscal deficits, which will limit the flexibility of their fiscal stimulus packages.
Asian Infrastructure enjoys unique position within the region. In spite of the collapse in exports and private investment, Asian governments have responded with stimulus packages worth over USD 800 billion. Out of this, a significant proportion has been directed to infrastructure projects. Long-term infrastructure needs for a wide range of projects, such as railways, roads and power stations across Asia, remain.
Asia has seen a decline in political risk over the past decade. There has been significant improvement in the politics of many Asian nations in last 10 years. Indonesia and India are the two recent examples where elections have yielded the most satisfactory outcome for investors as the resulting stronger mandates allow incumbent leaders Susilo Bambang Yudhoyono (Indonesia) and Manmohan Singh (India) to deepen the political and economic reforms in their respective countries. Political cooperation between countries in Asia is also improving, with relations between China and Taiwan serving as the best example.
Intra-Asian trade for final products will see a growth. The past decade has seen the dominance of intra-Asian trade by components and materials that get assembled and then exported outside Asia. Over the next 10 years, intra-Asian trade in final products and domestic demand will drive the Asian emerging economies far more than in the past.
Rising global weightings will see more funds into Asia. After quickly recovering in the last six months, Asia ex-Japan weightings in the MSCI AC World index have reached an all-time high. Higher weightings are likely to lead to global funds having to raise their exposure to Asia, either now or later.