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From Special Report: Global Opportunities - May 2012

Growth will make a return next year

It is expected Asian growth will fall before rebounding in 2013

By Rebecca Clancy | Published May 28, 2012 | comments

The eurozone debt crisis and the risk of rising commodity prices will be Asia’s biggest headwinds over the coming year, according to experts.

While it is forecast that Asia will continue to grow in the next couple of years it will need to pick up the slack of lost trade from the struggling western economies. Europe is Asia’s largest trading partner and with Europe continuing to struggle managers suggest the region will need to boost levels of trade within the countries in Asia.

Growth in the region is forecast at a rate that the west can only dream about, but it is expected that growth will fall in 2012 from last year, before rebounding in 2013.

In the Asian Development Bank’s (ADB) latest outlook published in April, it forecast growth for Asia to be 6.9 per cent in 2012, slightly down from the 7.2 per cent seen in 2011, before rebounding to 7.3 per cent next year.

The bank says growth will ease this year as the global backdrop is one of uncertainty.

“The eurozone is grappling with its sovereign debt crisis; and more generally, stagnation in the major industrial economies of the US, Europe, and Japan – developing Asia’s main trading partners – is stunting demand for Asia’s products,” the report states.

“Increased local demand in Asia has offset some of this lost trade, but it will need to take up more of the slack.”

ADB’s principal economist Donghyun Park notes that while the eurozone crisis remains the single biggest threat to Asia’s robust prospects, the possibility of another oil shock is also a risk, which could reverse the region’s falling inflation.

Inflation in the region has receded and is expected to slow to 4.7 per cent in 2012 and then to 4.4 per cent in 2013.

However, Mr Park says that while Asia is “well placed to weather the storm”, policymakers cannot be complacent.

“They need to be ready to respond if the eurozone deteriorates, particularly as global value chains – Asia’s growth-generating crossborder production networks – and sudden reductions in trade finance can magnify an external shock,” he adds.

“The eurozone crisis highlights the need for developing Asia to rebalance its economies toward domestic and regional demand and from dependence on exports destined for advanced countries. It also provides added urgency to efforts to broaden and deepen regional co-operation.”

Naoyuki Shinohara, deputy managing director at the IMF, expects growth in the region to continue at the same pace at last year, before rebounding in 2013.

He says he expects growth in industrial Asia to grow at roughly 2 per cent, as Japan and New Zealand recover from their natural disasters, while forecasting a decline in emerging Asia to 7 per cent in 2012, down from 7.5 per cent, before recovering.

But in spite of this growth, Mr Shinohara warns downside risks in Asia remain high.

“The most immediate concern is, as mentioned earlier, a resurgence of the euro area crisis: Asia’s trade and financial linkages with Europe imply that spillovers to the region could be considerable,” he says. He therefore notes Asian countries will need to strengthen domestic sources of growth in the region. Meanwhile another risk comes from commodity and food prices.

“Geopolitical tensions could push oil prices sharply higher given low global inventories and spare capacity,” he adds.

Recent JPMorgan Asset Management research agrees that the first half of 2012 will be “tricky” as investors wait for greater clarity on global macro issues, including the eurozone.

“As long as uncertainty persists, we will continue to see volatility in all risk markets,” the firm states.

“The challenge is finding a solution to the European sovereign debt problems that also supports Europe’s banks without severely hampering the broader European economy.”

The group says three key factors that can provide support to Asian markets would be waning inflation, an improvement in earnings and supportive valuations.

“As inflation figures begin to fall Asian governments will have plenty of room to stimulate growth through monetary policy. While the outlook for earnings is not clear across Asia, we are starting to see some positive trends. The earnings outlook for Asia has begun to improve,” it adds.

“The rate of earnings downgrades regionally has started to slow and Asia is relatively advanced in the earnings downgrade cycle. Finally, valuations are moving into the attractive zone in Asia. We haven’t quite hit the bargain basement levels of 2008, but we are not too far off them.”

The group notes top-down decision making in this sort of environment will be challenging and the important thing is to get the stock calls right.

“What our research clearly shows is that the best opportunities lie within countries and sectors where earnings are driven domestically, rather than outside Asia, it says

“From a sector standpoint the most attractive sectors are those that are geared to the Asian consumer.”

Rebecca Clancy is senior news reporter at Investment Adviser

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