Hedley August Market Commentary

Asia and the Pacific remains a dynamic region despite the sombre backdrop of what looks to be a challenging year for the world economy. Asia’s domestic demand has so far remained strong despite monetary tightening and slowing growth in developed economies. In fact, the region will contribute around 70 percent of global growth this year as its expansion accelerates to 4.6 percent from 3.8 percent last year. While many developed equity markets are struggling to perform, a number of emerging and developing markets are quietly moving higher. 

The exception to this is China, which is by far the biggest developing market, but more of this below.

China’s manufacturing contraction eased slightly in August while a gauge of new orders improved, providing some hope that the worst of the sector’s slump may be ending. Outside of manufacturing, though, there are worrying signs that suggest the economy’s recovery continues to be dragged down by the property downturn and subdued consumer spending.

China’s policies will continue to be a factor in driving further growth for Asia-Pacific stocks and the latest declines in share prices in this region may have been due to investors who were eager to tap into China’s reopening. Indeed, China’s economy was meant to drive a third of global economic growth this year, so its lack of improvement in recent months is cause for concern. However, over the past few year’s Asian economies, much like US companies, have been de-risking from China as a more authoritarian and interventionist regime strengthens its grip on the business world and while still having a strong influence on the region, many US and European companies are beginning to relocate their bases away from China into other low-cost Asian countries. However, economic growth in China is still anticipated to be around 5% this year from 3% in 2022 as the economy reopens from the Covid shutdown.

One of the major beneficiaries of the relocation move has been India. India’s economy excelled in its latest report card on strong services growth and a pick-up in manufacturing despite still-high interest rates. Steady growth in Asia’s third largest economy gives room for the financial authorities to fight inflation and with a very stable political backdrop and heavy investment in infrastructure, the country’s economy should continue to benefit from increased investment and international capital inflows.

Elsewhere, the growth outlook for developing economies in Asia and the Pacific stands at around 4.8% this year, as robust domestic demand continues to support the region’s recovery. The growth forecast for next year is marginally lower at 4.7% but nonetheless is still very healthy compared to much of the rest of the world (see chart below).

While global growth is poised to decelerate as rising interest rates and Russia’s war in Ukraine weigh on activity and inflation remains stubbornly high, emerging markets and Asia in particular look set for a period of healthy growth. In addition, Asian economies, China excepted, are not saddled with huge amounts of debt and with equities priced attractively compared to western valuations the regions stock markets are well placed to capitalise on any upward momentum.