It has been well understood for some years now that the driving force of global growth over the next decade is most likely to be the rise of the middle class consumer in the larger emerging economies, mostly in Asia. This argues for heavy exposure, on a long term or secular view, to Asian stock markets and those Western companies that are successful in selling to the Asian consumer.
This secular view does however, from time to time, encompass cyclical periods of weakness, and the Asian stock markets have endured such a period over the last year and a half. Current price levels in Asia provide an excellent opportunity for investors to buy into the key secular trend at a cyclically opportune moment.
The recently announced change in Chinese leadership has, arguably, inhibited the Chinese leaders from taking stronger policy action to support its economy, as attention within Beijing in the last year has focussed on internal Party matters, rather than the state of the economy. The economy has been surprisingly weak for several quarters, and the official data was even permitted to show the last quarter as delivering 7.4% growth, which is slightly below the government’s 7.5% target. Other data from non-government bodies have appeared to show a much weaker economy this year.
The two major issues holding back a more supportive economic policy have been sharply rising food and house prices, both of which hurt the poorer sections of Chinese society. In recent months however, both of these areas have shown distinct slowing in their inflation rates, and this has given policymakers more scope to ease policy. The economic data published over the last two months have also indicated signs that the tide of the economy is clearly stabilising and may be turning up. The reason for this upturn seems to be an improvement in Asian consumer demand, rather than export demand from the West. China’s new leadership team will thus be taking over at a good moment.
The Shanghai stock market has been a very poor performer since its peak in 2007, and has only been lower than current levels in late 2008. Turnover in the Shanghai market is currently very low and is dominated by private Chinese investors seeking to make short-term trading profits. Interest could easily be revived by some good news from the Chinese economy as valuations are historically low. The other Asian markets, with their greater base of institutional shareholders (particularly foreign) and more-established, better-governed companies, have outperformed the Shanghai market, but valuations are still well below historic averages at a time of above-average profitability.
The secular thesis of much stronger growth in Asia than in the West is still very much intact; the recent cyclical weakness caused by a tightening of Chinese policy in 2011 and the slowdown in Europe, China’s largest regional trading partner, has led to underperformance of the Asian equity markets over the last eighteen months. Recent data give grounds for believing this cyclical weakness is ending and that now provides an excellent opportunity to increase investment exposure to Asian equities.