The unexpected market outcome in the first half of 2011 has been the underperformance of Asian and emerging markets versus developed markets, particularly the US. The world’s largest and still most influential economy benefitted from a broadening and improving recovery, supported by a second round of quantitative easing (QE2). The general expectation for continued Asian and emerging market outperformance was based on superior growth prospects, but so far in 2011 the focus has been on elevated inflation rather than growth.
For the first half of the year Asian central banks have been striving to get ‘ahead of the curve’, with interest rates moving up as expected and other policy measures also being employed. China and other countries in the region are not without their challenges, but they continue to grow at a strong rate, albeit at lower levels versus previous years. Indeed, economic growth in Asia is still enviable when compared to Western developed economies, to say the least. So far in 2011, Asian currencies have continued their advancing trend and maintain their attractiveness relative to tougher choices available elsewhere. Gold has continued to perform well this year, in part a reflection of US dollar weakness.
All of this has occurred against a backdrop of a series of shocks that might typically have been expected to cause greater damage to the global economic recovery – the eruption of geopolitical tensions in the Middle East and North Africa, the subsequent strong rise in the oil price, a continuation of Europe’s fiscal crisis, a showdown over the US budget and finally the tragic earthquake and tsunami in Japan. This is a long list by any measure, and provided for a bumpy ride in risk assets.
Despite the year-to-date underperformance of emerging equities, we remain confident in the economic outlook for Asia, and expect emerging and Asian markets to resume their lead for the balance of 2011, driven by superior economic fundamentals and supported by slightly cheaper valuations relative to their developed-market peers. This view is expanded on by Norman Villamin and the wider investment team, who articulate our latest thoughts on the economic and market outlook for specific markets in Asia. In terms of key investment themes, the continuing search for yield by global investors will remain relevant as we expect only a modest rise in historically low interest rates in the major developed economies. In this regard, there are plenty of opportunities to be found in many corners of Asia’s capital markets.
In summary, Asia cannot detach itself from a dependence on a steadily improving world economy, and any setback on this front remains the most visible risk to Asia as developed economies continue their prolonged recovery from the Global Financial Crisis. However, we remain constructive on the outlook for the global economy and markets in general, and Asia in particular. We remain positive in our assessment for the outlook for Asia but of course we must remain vigilant.
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