Asia Remains Challenged In The Current Quarter

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Includes: EWJ, EWY, FXI, INDA
by: Five Dimensions Research

Summary

Exports and imports keep on falling in Asia.

Japan's PMI has slipped down into the contraction area in March 2016.

Consumer confidence remains muted across the region.

The jobless rate has hit a record high in South Korea in February 2016.

The major Asian economies did not show any signs of sufficient economic improvement in February 2016 and remained in the contraction area. Both exports and imports fell on a yearly basis throughout the region. In US dollar terms, a decline in international trade was reported by China (NYSEARCA:FXI), Japan (NYSEARCA:EWJ), South Korea (NYSEARCA:EWY) and India (BATS:INDA), as shown in the charts below:

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*Services included

Source: Investing.com, own graphics

The reported export and import growth rates fell below their 12-month average in China, Japan and South Korea. Both metrics have decreased by more than 10% on a yearly basis in all the countries mentioned in the article except India. Let me remind you, the same picture was painted in January 2016; there are no changes to the last month. Moreover, in US dollar terms, Chinese exports dropped 25.4% year over year in February, just shy of the record monthly slump of 26.4% reported at the height of the financial crisis.

Both exports and imports have also declined on a local currency basis in all the economies except India. And again, that is exactly what happened in January 2016. India was the only bright spot on the map since it has indicated positive growth on a constant-currency basis in February.

The explanations for such a decrease were provided in my previous article. I think the primary reasons remain unchanged; they are mainly sluggish domestic demand and an ongoing weakness in the global economy. The only positive note, which has been observed last month, is the slight growth of the Japanese exports to China and the US, which were down in January 2016.

Another big theme is production, which seems to be losing momentum.

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Source: Investing.com, own graphics

The Manufacturing Purchasing Managers' Index is considered to be an important prediction since the industrial sector is still a large part of the Asian economy. As seen in the graph, Japan has finally slipped into the contraction area in March. Moreover, China had the 12th straight month of decline in February, and the situation has even got worse when comparing to the last four months.

Per Markit:

Operating conditions at Japanese manufactures deteriorated in March. Production and new orders both contracted, with output decreasing for the first time in nearly a year. This suggests industrial production will continue to fall. One of the key drivers behind the decline in total new work was a slump in international demand, as new export orders decreased at the sharpest rate in over three years. As a result, goods producers cut back on input buying and were less confident in hiring additional workers.

Thus, the slump in international demand, which has been clearly noted in the report, seems to be the key reason for the ongoing slowdown. By the way, although India's PMI remains in the expansion area, which implies growth in production on a monthly basis, it has been falling on a yearly basis during the last three months, as seen in the picture below:

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Finally, a few charts for the consumer sentiment in the region:

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India seems to be the only country with the growing consumer confidence, whereas South Korea is at the mark not seen since 2012. Japan has also got closer to the record low not registered since the beginning of 2015.

Takeaway

The industrial and export growth is crucial for the Asian economies since these economies are still export oriented and heavily dependent on industrial production. The latest developments should be considered as a worrying signal for investors, as well as the jobless rate in South Korea that unexpectedly rose to 4.1% in February 2016, which was the highest level since February 2010. It is hard to forecast precisely so far whether it is the beginning of a depression or not. However, I assume, the first scenario is still highly probable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.