Contrary to 2017, when Asia ex Japan equities enjoyed a strong rally with extremely low volatility, 2018 has been a bumpy year. Global events, including rising trade tension and a stronger US dollar and yields, are preoccupying investors, masking solid economic growth from many countries in the region.
Will the tide turn in 2019? We believe there are good reasons that Asian markets will regain favor from international investors given:
Healthy economic growth is obscured by near-term headwinds
Economic growth in Asia ex.Japan is expected to remain strong despite mild moderation, (6.1% in 2018 and 5.9% in 2019). ¹
In China, we expect economic growth to achieve the government’s target of around 6.5% in 2018 and to be between 6.0% and 6.5% in the medium term given the government’s rebalancing efforts toward a consumption- and service-led economy. We expect continued innovation in the consumer and information technology sectors to address growing and more sophisticated consumer demand amid rising income and accumulated wealth.
In India, economic growth has been on a positive upward trend, and we expect it to gather further strength in 2019. We believe private consumption, particularly in the rural area, will remain the dominating growth driver, supported by strong expansion in per capital income, which is projected to increase at a compound annual growth rate of 10.2% between 2016 and 2025.² Elsewhere in Asia, economic growth is expected to remain steady, predominately driven by robust private consumption.
We believe Asian economies are well-positioned to withstand contagion risk from other emerging markets (in the case of continued strength in US dollar and yields) given their stronger trade balance, higher reserve adequacy and improving external debt profile. Asian countries are not like Argentina and Turkey, which are running current account deficits at around 6% of gross domestic product (GDP), and their overall external debt to foreign exchange reserve level is also much lower. ³
1 Source: Bloomberg L.P. 2018 and 2019 GDP growth rates refer to Bloomberg consensus estimate as of Oct. 10, 2018.
2 Source: Deloitte and FICCI, estimate as ofOct, 2018.
3 Source: CEIC, Morgan Stanley Research.