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Global Top Cat

Asia: As Bad as it Gets? 

By Yiannis G. Mostrous, on Mar. 16, 2016

Exports remain an important contributor to Asia’s economic growth story. In the first two months of 2016, the US dollar value of South Korean exports—a bellwether for the continent—tumbled by 16 percent from year-ago levels, maintaining its 15-year correlation with global oil prices.

With oil prices finding a bottom and robust export demand drawing down inventories in Asia, exports from the continent should hold up reasonably well in the second half of 2016, especially on a year-over-year basis. This tailwind should help to alleviate fears of a global recession and boost Asian economies.

As always, all eyes will be on China’s economy, which will continue to push and pull emerging-market equities in Asia.

Investors remain concerned about elevated debt levels in China. Policymakers in Beijing are aware of this challenge and have the necessary tools at their disposal to manage the issue; all things considered, investors should give the government the benefit of the doubt when it comes to managing the economy.

Unfortunately, most investors assume the worst about China until proven otherwise. This herd mentality leads to violent stampedes into and out of Chinese equities, with little regard for the economy’s long-term promise.

Without overlooking the occasional policy misstep or communication mistake from Beijing, we’ve generally maintained a more sanguine outlook for the China’s economy—a stark contrast to most Western investors who have warned of an eventual or imminent collapse, depending on sentiment at the time.

The Bank for International Settlements’ (BIS) recently published Quarterly Review includes a piece attributing capital outflows from China to the unwinding of renminbi carry trades and repayment of dollar borrowings. In other words, Chinese authorities haven’t lost control of the situation yet.

A look at the latest economic data from China indicates that consumption has held up reasonably well, though the rate of growth has slowed.

Areas of strength include online shopping, air travel, courier deliveries and dining out—all these service-related categories have posted double-digit growth, while the manufacturing side of the economy has been missing in action.

 

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