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.