The resource rich nations of South Asia have benefited from the increasing demand for hard and soft commodities from North Asia in recent years to run up solid current accounts. The election cycle in North Asia has brought in new leaders in South Korea and Taiwan who plan to use infrastructure spending to help smooth out the slowdown in exports to the G7.
China and India remain the most interesting markets in Asia at present, offering the potential for high single digit GDP growth. Growth is focused on the secular themes of industrialization, improving household consumption and infrastructure spending.
On the monetary side, China is tightening its interest rates at present and has increasingly used administrative tools, such as increasing the banks’ reserve requirements to slow loan growth. Inflation has become an issue for policymakers since H2 2007, and the obvious policy response is to allow the Renminbi to appreciate further, or at the least to widen its trading band against the US dollar. Although this would be a negative for exports, it would improve Chinese purchasing power and help imports of basic commodities. Our focus in China is on domestic infrastructure, asset reflation and consumption-related stocks.
In India there is less of an issue in terms of inflation, and the emphasis is on infrastructure spending, particularly in power generation and construction. As the recent budget demonstrated, the Indian government is committed to a balanced, infrastructure-led development policy. This implies growth in social, as well as physical infrastructure, with health and education receiving favourable attention.
By sector, materials and industrials are our preferred ways of accessing these growth themes, although asset reflation continues to be important, particularly for Hong Kong with its dollar peg. M&A will be a major theme this year in the materials sector, with Indian firms likely to become as aggressive as China in acquiring positions in strategic assets. This downturn is giving rise to the next generation of global companies as Asian firms acquire their G7 clients. Reducing costs by transferring production to Asia is a potent weapon, which will accelerate as G7 growth slows.
James Weir, fund adviser, Atlantis Asian Special Situations Fund.
