While investor sentiment remained largely positive in the first half of the year, it took a sharp turnaround in the third quarter on the back of concerns over emerging markets, the deceleration in US growth momentum and the downturn in commodity prices. The deterioration in investor sentiment was exacerbated by China’s policy missteps in its bid to stem the equity market declines, and the surprised devaluation of the RMB.
At the time of writing, the headwinds that have contributed to the broad-based correction in Asian markets have not shown clear signs of abating. However, we are inclined to take a more optimistic view as we head towards 2016. This is supported by our view that the growth trajectory in the US and Eurozone remains intact. The US has been generating close to 200,000 jobs, steadily removing the labour market slack and contributing to the improvements in consumer sentiment. The Eurozone, as well, should see growth at a moderate clip in 2016. Concerns over EM Asia have been emanating mainly China. We anticipate the ongoing stabilization of China’s property market, a moderately expansionary fiscal policy and resilient consumer spending would enable the economy to see growth strengthening into 2016. Our confidence in Asia is supported by the IMF’s own analysis, which has given EM Asia a lower probability of recession and deflation compared to other regions (see chart 1).
Chart 1: IMF World Economic Outlook – October 2015
A key risk that has been frequently cited for emerging markets, including Asia, was the weak oil/ commodity prices. Depressed energy prices, we feel, cannot be sustained for an extended period, as the cheap levels should invigorate consumption and reduce production levels. Another risk cited is the considerable build-up in debt in Asia. Credit to private, non-financial sector in Asia ex-Japan had reached about 144% of GDP in the 3Q 15, far surpassing the 83% in 1996 before the advent of the Asian Financial Crisis (AFC). By this measure, critics fear a repeat of the AFC. However, we view this risk to be low given the improvements made in terms of external stability as reflected by the higher foreign reserves and healthy balance-of-payments in Asia (see chart 2).
Internal stability is also likely to be maintained with sound banking system, a functioning bond market and stable fiscal position. Furthermore, with the general economic slowdown in Asia, credit growth is expected to decelerate. This should bring the rise in debt-to-GDP ratios to a much more moderate and sustainable level.