Six years into the global financial crisis, Asian stocks are at their record highs. While markets have jumped 137% since the meltdown, bourses in India, Indonesia, South Korea, the Philippines and most other countries are well above their 2008 peaks. Second quarter earnings have on average been growing at 25%-to-30% year-on-year, led by robust exports and domestic consumption growth. Asia is expected to grow at 3 times the pace of the developed world this year.
For Michael Ivanovitch, who served as a senior economist at the Organisation for Economic Co-operation and Development (OECD) in Paris as well as international economist at the Federal Reserve Bank of New York, India is particularly promising. With a new market-oriented, reform-focused leadership in place, Indian markets have rallied by around 30% in dollar terms and 24% in rupee terms so far in the year 2014. India is likely to outperform most emerging markets (EMs) in 2014, says Adrian Mowat, chief EM and Asian equity strategist at JP Morgan Chase & Co.
Despite a slowing economy, China is still seen as a regional growth engine whose domestic demand has a prodigious potential even at a growth rate of 7%-8%. Well-managed South Korean and Indonesian economies are also seen enhancing Asia’s growth momentum in the years ahead.
These four Asian countries account for 26% of global gross domestic product.
Asia has a large growth potential in regional trade. The intra-Asean (Association of Southeast Asian nations) trade is estimated to have crossed $600bn in 2013. Asean is China’s third-largest trading partner with bilateral trade estimated at $350bn.
Three of Asia’s most populous countries are now led by dynamic and reform-minded leaders: China’s Xi Jinping, India’s Narendra Modi and Indonesia’s Joko Widodo could eventually be ranked among their countries’ greatest modern leaders, says Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore.
Can investors bet on an Asian upswing?
The rallying markets, sure, have raised the risk of a sudden meltdown. Some triggers for a correction are anticipated: a possible rate rise by the Federal Reserve in early 2015. But some have already been tested: from the Ukraine-Russia tensions or an Argentine debt default. But any flare-up in the simmering South China Sea ownership tensions among the Philippines, Vietnam and China, Brunei, Malaysia and Taiwan, among a raft of other regional issues, could also lead to a sharp reversal.
Investors may also factor in the turmoil that struck EMs following former Fed chief Ben Bernanke’s surprise announcement in May 2013 of a draw-down in the $85bn-per-month quantitative easing.
Asian countries still face deeper policy dilemmas of rising inequality, greater volatility and reduced room to manage the real economy. But with more stable and market-oriented governments implementing sounder policies, Asian markets may well sustain their rallies in longer term.
According to Indian central bank governor Raghuram Rajan, who had warned of a crisis ahead of the 2008 crash, investors hope markets wouldn’t unwind messily. “They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time.”