Even though markets have declined, Asia looks set to escape the worst impact of the European debt problem, says Andrew Beal, portfolio manager at Henderson TR Pacific Investment Trust plc.
Despite the current European debt crisis, economic data indicates that Western problems will have a limited impact on their Asian counterparts. Beal predicts that the region's markets will return 10-20% by the end of 2010.
Asia's economic momentum remains very strong. At the start of the year, the greatest fear was that the region's economies were growing too fast and risked higher inflation. Slower growth in Europe and the US may actually help alleviate these fears.
There is limited risk that slower Western economies will derail Asia. Beal says, "Depending on the country in question, Europe receives approximately 10-20% of Asian exports resulting in 5-10% of Asian GDP exposed to Europe, thus even in a very negative scenario we would see, at most, a couple of percentage points knocked off Asian GDP growth."
The rebalancing of Asian economies towards domestic consumers continues to gather momentum.
Wages in China have been increasing rapidly in recent months. Beal argues that this is part of government policy designed to put more money in workers' pockets and to encourage a move within the manufacturing industry towards the lower cost and less developed Western provinces. We are also likely to see more low end manufacturing moving to Vietnam, Indonesia and India but the chances of these economies taking China's place in higher end manufacturing is low in Beal's opinion.
He argues that "the infrastructure and skills just do not exist in these countries to allow them to take significant share from China. In the industries where China has a sustainable advantage, Western companies and consumers are just going to have to absorb these additional wage costs".
Beal notes that the policy of allowing higher wages in China is possible at the moment precisely because the economies of the West are so weak, "slow growth in Europe and the US keeps commodity prices under control and prevents higher wages in China leading to a build up of inflationary pressure".
Beal also dismisses fears that "bubble" conditions exist in China, stating: "Market concerns about bubbles in China are vastly over exaggerated and this misplaced market fear is creating a number of interesting stock plays.
“The presence of well capitalised liquid banks and predominantly debt-free consumers has created a positive outlook for earnings across Asia. This is particularly true of China, Hong Kong and Taiwan, where we are finding more stocks to buy.
"Despite the currently fragile sentiment towards markets, defensive behaviour is too late and investors now need to slowly average into these markets over the course of the next couple of months with a view to being fully invested by the end of the summer," said Beal.
