Over the next decade, I expect Asia’s economies to continue to raise living standards and to narrow the income gap between its own citizens and those in the U.S. or Europe.
Why do I think this?
Asia continues to have a high savings rate. A country cannot invest or grow over the long term without a pool of savings, and it can be r isky to rely on external funding to finance domestic growth. Asia currently has enough savings to support its own development. It also has a track record of increasing productivity through improving education. The region has championed the individuals’ desire to make money. It has successfully opened its markets to the world in order to learn about new products and methods of industrial organization. Finally, it has a decent track record of government policy reform to support growth and markets. None of this has been perfect; and indeed, although rates of change hace been fast, Asia is still a relatively poor part of the world. Over the long term, all of this just means that there is plenty of blue sky ahead.
But what about the next year?
Much will rest in the hands of central bankers and still more will depend on Asia’s reform progress. For those who think it is too easy to focus on the future and too dangerous to dismiss the near term, I will be watching the following during 2015 to see how Asia’s growth is progressing.
First, Japan is home to the world’s best central banker, Haruhiko Kuroda. How often has that sentence been written in the history of central banks? Mr. Kuroda has paid attention to the monetary policy scholars regarding zero percent interest rates. He knows he has to be aggressive— and indeed credibly aggressive—in monetary policy. He seems willing to confront the conventional wisdom that bankers must be conservative, die-hard inflation fighters. Prime Minister Shinzo Abe appears to support him on this issue. I expect Mr. Kuroda will continue to push inflation expectations up to 2% and to keep them there. Remember, a weaker yen is the symptom of the policy, not the policy itself.
This inflation policy also creates incentives for firms to whittle down cash balances and raise prices. Not all companies will do it but we will look for those that have the willingness and the ability to take heed.
Yes, in a weak yen environment, even domestically focused companies can be attractive holdings because a reflationary environment can offset the currency weakness, particularly among companies that use higher operating leverage.
How does this compare to the rest of the world?
With all the talk of tapering, in effect, monetary policy has been tightening in the U.S. since May 2013. The Standard & Poor’s 500 (S&P 500) seems unconcerned, as it continues to rise on somewhat expensive valuations, considering the fact that corporate margins are already high.
Most people expect the U.S. economy to strengthen—and there is probably better than a 50–50 percent chance that it will. But there must have been some impact from the tighter policy and I do not think investors are paying much attention to the risks of a slowdown. The recent fall in the price of oil is surely a warning that all is not well with global growth.
Opinion article by Robert J. Horrocks, Chief Investment Officer, Matthews Asia
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