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No Hard Landing in Asia

Asia-Pacific Outlook: 2012

12/14/2011

While its exposure to European banks is real, Asia’s long-term growth prospects are still quite robust. Look for policymakers to manage inflation effectively and—assuming the euro zone doesn’t collapse—attractive stock-buying opportunities.

Summary

Potential for deleveraging from European banks could weigh on Asia
Nevertheless, the long-term macroeconomic outlook remains robust with Asian equities trading at compelling valuations.

The key risks to Asia heading into 2012 come from outside the region, predominantly Europe. While Asia is likely to see continued volatility in the face of uncertainty from developed markets, we maintain our view that the long-term macroeconomic outlook for Asia is still quite robust and does not include a “hard landing” nor the persistence of a stagflationary environment of rising inflation and slowing growth.

As the majority of external lending into Asia comes from European institutions, the potential for deleveraging from European banks in the current environment could weigh on Asia as liquidity flees. Overall, it appears that Korea has the greatest exposure, followed by Singapore and Indonesia, if European (ex-U.K.) banks are forced to retrench their balance sheets; however, the largest single “foreign” presence in Asia is made up of U.K. international banks, which in parts of the region are continuing to expand rapidly. So, while this is not a healthy situation should any deleveraging occur, the headwinds for Asian economies from deleveraging by European (ex-U.K.) banks are much less of an issue at the aggregate level than they theoretically could be in other emerging markets.

Outside of exogenous macro factors, within Asia inflation will be a key metric to watch into and through the early part of next year. Particularly for inflation-sensitive markets like India, signs of falling inflation will be welcome as fiscal and current account balances take a heavy toll in environments of high inflation. Indonesia, now with the highest real interest rate in the region outside of Australia, has already started to reduce interest rates, and we would expect at least another rate cut next year. Upcoming presidential and legislative elections in South Korea, Taiwan and India, as well as the establishment of new leaders in China and Hong Kong, should pave the way for more constructive growth policies into the second half of 2012.

Currencies in the region still look quite attractive as higher interest rates and robust growth opportunities make the market attractive. In addition, earnings expectations have already been reduced and stock prices have already started to reflect an environment of slower growth. Under the assumption that the euro zone does not collapse, Asian equities look very compelling as many are trading at the low end of their historical trading range.

Raymond Chan is the CIO of RCM Asia Pacific

Past performance is no guarantee of future results. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

A Word About Risk: Equities have tended to be volatile, and do not offer a fixed rate of return. Bond prices will normally decline as interest rates rise; the impact may be greater with longer-duration bonds. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. Gross Domestic Product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, www.allianzinvestors.com 1-800-926-4456.