By Paul Chan
Asia Pacific ex-Japan appears to be one of the bright spots for growth in 2015. In a "slower growth" world, the region is still expected to maintain GDP growth of about 4 to 5% per year.1
However, with growth moderation being a global phenomenon, Asia, like many other parts of the world, is undergoing a gradual growth deceleration. So how will Asian economies and corporates sustain their competitiveness, and what are the implications for Asian equity investors?
We believe favorable cost structure for corporates, a coordinated review of Asian currencies and the transformation of economies by new governments will be the key themes for Asia in 2015.
Favorable cost structure for corporates
Asia Pacific ex-Japan is undergoing a normal business cycle adjustment. As general demand is gradually leveling off amidst decelerating global growth, input costs are adjusting in response. Material costs - ranging from agricultural products to hard commodities -are the biggest cost reduction drivers. Financing costs are coming down in selected markets, such as China and Korea, where we have seen interest rate cuts.
Looking ahead, a favorable cost structure for corporates will serve as a key catalyst for margin improvement.
Synchronization of Asian currencies
Currency has been a swinging factor in determining returns of specific Asian markets for last two years.
We expect the U.S. dollar to continue to strengthen heading into 2015. With key markets depreciating for the past three months - Japanese yen are down -10.0% and Korean won are down -4.3%2- we ponder how the other Asian currencies will react.1
Instead of currency divergence across the region, we are likely to see Asian currencies move in a more synchronized manner in 2015. In any case, a stronger U.S. dollar would be positive for Asian exporters.
Economic transformation to be led by new Pacific leadership
In the past two years, China, India and Indonesia have ushered in crucial new leaders. In particular, the recent elections in India and Indonesia marked the start of a new beginning for the Pacific Century and its nations, which account for about 20% of world's population.
Reforms were rolled out in earnest shortly after new leadership took the helm of governments in several countries. In a world of slower growth, we believe maintaining competitiveness is very important. As such, we believe a dedicated focus on competition and productivity are common goals of the reforms being launched by the various nations.
With earnings on the MSCI All Country Asia Pacific ex-Japan Index expected to expand 9.6% in fiscal-year 2015,2 Asia Pacific ex-Japan is no longer the growth engine it once was, as world trade has been static over the last three years.
Instead of focusing on top-line earnings growth, we believe Asian equity investors should shift their focus to the search for quality stocks, as measured by their competitiveness, shareholder returns and corporate governance. More attention also should be paid, we believe, to companies' capital allocation discipline.
- Asia Pacific ex-Japan is expected to grow at 4.6%, 4.7%, and 4.9% in 2014, 2015, and 2016 respectively. Source: CEIC, IMF, Factset, Morgan Stanley Research, as of Dec. 23, 2014. Assuming the same weights of MSCI AC Asia Pacific ex-Japan Index for 2014 to 2016.
- Bloomberg, as of Jan. 3, 2015
The MSCI All Country Asia Pacific ex-Japan Index is an unmanaged index considered representative of Pacific region stocks, excluding Japan.
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