Key Investment Themes for 2011
We expect 2011 to be another positive year for Asian risk assets as the global economy continues to recover from the financial crisis and ensuing recession. We also anticipate that the volatility seen in Asian markets in 2010 will continue this year as the global recovery remains uneven, with reduced access to credit in developed markets making it more difficult for consumers and small businesses to smooth their spending from quarter to quarter.
Economic growth across Asia should continue to outpace not only the developed world, but much of the emerging world as well. However, growth in Asia is expected to decelerate moderately from 2010 levels.
While rising inflationary pressures should lead to further Asian policy tightening in early 2011, we do not believe this dynamic will derail Asia’s fasterpaced growth. We view this policy tightening as a continuation of the process of withdrawing the stimulus injected in 2008-09. With uncertainties remaining around global growth prospects, aggressive withdrawal of that support appears unlikely.
Instead, we expect Asian policy-makers to address inflation risks through continued use of administrative measures, modest capital controls and, perhaps more importantly, via strengthening currencies. These moves should be accompanied by broader efforts to change the composition of Asian growth away from exports toward domestic consumption.
In Asian economies with a high surplus of investment and capital, such as China, we anticipate policymakers will attempt to expand domestic consumption further. Broadening the social safety net to include a broader range of services such as healthcare, education and insurance should be a key initiative.
In economies with low investment rates, such as India and Southeast Asia, strengthening currencies and excess liquidity flowing in from the West should have a different result. Long-term trends of declining local-currency borrowing rates tend to fuel growth in capital expenditure and help stimulate investment in capacity and infrastructure.
New Era
We expect investors will be rewarded for taking on exposure to the corporate risk associated with equities and corporate bonds in 2011. Within Asian fixed income, we look for corporate bonds to outperform government debt, though we expect Asian fixed income in general will struggle to replicate the double-digit returns of 2010.
We expect equities to outperform both government and corporate debt, given a combination of reasonable valuations, attractive earnings growth and – for foreign investors – the prospect of meaningful currency appreciation against the dollar and euro.
We expect North Asian (Greater China and Korea) equity markets to outperform their peers in Southeast Asia (Singapore, Indonesia, Malaysia, Thailand and the Philippines), given more attractive valuations, greater prospects for currency appreciation and greater exposure to accelerating US growth through their export sectors.
Overall, we expect 2011 to be characterised by Asia’s continued transition from being the world’s dominant producer and saver to being increasingly consumer-driven. Like 2010, this transition will likely come in fits and starts, resulting in an elevated level of volatility that investors will need to navigate in the year ahead.
