This has been compounded somewhat by the view that the US economy is in the process of a mid-cycle slowdown. The concern, is that if the US economy is not providing the same contribution to growth as in the recent past, will the domestic side of Asia’s economies be robust enough to maintain growth rates at attractive levels.
In China the tightening has taken the form of constraints introduced to slow the rapid growth in property prices across an increasing number of China’s metropolitan areas, followed by August’s increase in both the one year deposit rate and the one year benchmark lending rate, the first time that the two have been raised simultaneously for two years. The Chinese authorities have also lifted the reserve requirement ratio for foreign currency deposits. Some economic statistics, for example, July’s industrial production numbers, have suggested there may be tentative signs of a slowdown but at this point economic forecasts continue to indicate real GDP growth in 2007 of around 9 per cent.
Having announced in February that it viewed the deflationary era as over and that it would be moving away from the so-called “zero interest rate policy”, the Bank of Japan subsequently raised short-term rates by 0.25 per cent and continues to make positive noises about the outlook for recovery in the domestic economy. However, that many international investors appear not to be convinced and point to both the somewhat inconsistent pattern of economic releases and the fall in money supply growth as signs that the economy is not yet developing much momentum. As a result, the yen has continued to be weak, implying that further interest rate rises may not be seen for a while yet. Our view remains that the central bank is doing a decent job of treading the delicate path of returning to an appropriate level of interest rates while encouraging the Japanese consumer to change their mindset from one of deflation to one of recovery.
From a stock market perspective Asia continues to offer some great investment opportunities, many of which are companies whose positions compare well to their global peers. The return on equity of the Japanese corporate sector continues to increase and though Asia often is associated with the dynamics of the commodity cycle and low cost manufacturing, we continue to find stocks with good growth prospects across a wide range of sectors, from autos, financials and transport to healthcare and technology.
Stephen Dowds, head of international equities, Northern Trust Global Investments.
