Abi Oladimeji, head of investment strategy at Thomas Miller Investment, outlines the headwinds and tailwinds for Asia.
In 1997/1998 and 2007/2008 the MSCI Asia Pacific ex Japan index fell just over 54% in US dollar terms. The Asia crisis, starting in Thailand but quickly spreading throughout the region, resulted from an excess of borrowing in dollars, failing currency pegs and a balance of payments crisis.
The later financial crisis was more of a global event, but similar issues hurt the region.
Next year will see the tenth and 20th anniversary of the start of the financial and Asian crises respectively. If history repeats itself, the 22% fall we have seen since March last year will be only the precursor to some real pain.
The signs are not encouraging. US dollar debt has funded significant parts of the Asian economy, and although we ought not to fear a balance of payments crisis (given levels of currency reserves), a rising interest rate cycle in the US will certainly be a headwind.
Meanwhile, corporate earnings are under pressure and are expected to decline for a second straight year in 2016.
After an impressive run of export-oriented industrial growth, China is trying to engineer an unprecedented shift: from an industrial to a consumer-focused economy without serious dislocation. This is a further threat to the region.
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However, most countries in the region can be characterised as commodity consumers, so have benefitted from price weakness in energy and metals, with metal price weakness caused by slowing Chinese growth probably set to continue.
Equally, the oil market will take some time to return to equilibrium, so the tailwinds from lower input costs continue to help.
Finally, valuations hit a level in August last year and again in February this year that, while not at the extremes of 2008, have historically been good points to buy.
Buying solely on valuation grounds can be a test of nerve, as this is a factor that tends to perform over the mid to long term, but not necessarily over the short term.
But it does work, so on that basis one should have some exposure, and that is before we start talking about the reform agendas in places such as India, which have the potential to take up some of the growth from China.
Abi Oladimeji is head of investment strategy at Thomas Miller Investment
Bull Points
• Favourable valuations remains
• The continuing commodities tailwind
Bear Points
• Exposure to a US tightening cycle (whenever that might be)
• The difficulty of the Chinese economic transition
