The dazzle from Asia’s equity markets’ performance has dimmed somewhat but with a total return from the MSCI Asia ex-Japan of 23.6% in local-currency terms, the region still outperformed most major equity indices by a comfortable margin in 2006.
But 2007 will be a more challenging year for the region. Chief among these challenges are likely to be the effects of the gradual draining of liquidity as interest rates rise. China has already initiated efforts to curb its economy’s runaway growth rate, India has started increasing interest rates and the Bank of Japan, notwithstanding an economy still flirting with deflation, is already sounding hawkish. That, coupled with the slowdown in the US economy, augurs ill for Asia’s main export-led economies, chiefly China, Japan, Korea and Taiwan.
China will probably avoid the nastier effects of slower exports since it continues to gain market share from global rivals and is cushioned by a large consumer economy. Japan, with a domestic economy that seems to be retreating back into its shell, and especially Korea and Taiwan, which barely have consumer economies to speak of, will probably be much harder hit.
With consumer spending likely to play an increasingly important role in driving regional economic growth in the year ahead, it is the region’s southeastern inhabitants that might surprise on the up side. Indonesia and the Philippines both boast fast-growing consumer economies and their governments’ improving fiscal positions should help drive growth in the year ahead. Consumer goods, and retail and finance plays should be the favourites to benefit from this trend.
Malaysia and Thailand, where the outlook is less certain, are still expected by most analysts to deliver solid economic growth. Singapore might suffer from a slowdown in exports but, as the region’s financial centre, it stands to gain from increased regional investment flows as well as growth in its domestic economy fuelled by real estate, construction and tourism.
One key sign that southeast Asian markets are likely to outperform strongly will be any meaningful increase in foreign direct investment. In a region largely starved of foreign capital since the 1997 financial crisis, even a modest increase in FDI will have a major impact, most obviously in Indonesia and the Philippines. Of course, capital inflows will also drive domestic real estate and other capital asset processes with potentially dangerous bubble-forming tendencies. Arguably the effects of that are already being felt in Singapore because of feverish speculation engendered by its casino projects.
Increased capital flows into the region coupled with a widely expected weaker dollar also make a compelling case for Asian currency appreciation, particularly in southeast Asia. Expect the Singapore dollar to perform well as the Swiss franc of the east.
