Asia Fights Back Despite Dollar
Despite big losses and heads rolling at commercial and investment banks, flows into Asian markets continue to remain strong.
The billion dollar (I use billion because a million dollars seems like nothing nowadays) question is whether Asia can decouple in the event we see a significant slowdown in the US economy.
I have been and remain quite bullish over the rising middle class and domestic consumption story in Asia.
It is clear that Asian consumers are seeing increasing discretionary income and are demanding better quality products, lifestyle and more choices.
However, whether this theme/trend is sufficient to offset a worse case scenario of a global slowdown, driven by a more significant than expected slowdown in the US economy is another issue.
Citigroup's Strategist, Markus Rosgen, recently wrote an excellent thought-provoking piece on this specific topic, debunking the fast becoming consensus opinion that Asia can potentially decouple and go on its own steam if other regions, or more specifically, the US starts to slowdown.
Nobody will argue against the fact that Asian domestic consumption is on the rise because Asia has become the manufacturing base for the world.
The key question is whether Asian demand has grown enough to absorb demand from a slowdown in their key customers.
From a top down perspective, it is difficult to see how slower demand from the US will not hit the Asian economies, especially the more export driven countries.
Some economists would like to argue that any slowdown in the US could be offset by strong growth in Europe, and consequently continue to drive export growth in Asia.
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But there is still some correlation between European and US growth rates, albeit the correlation is not as significant compared to US and Asian economies in the past.
However, with globalisation, the correlation between different countries growth has risen not fallen, which makes complete decoupling trickier, if not wishful thinking.
Still, in my opinion, this is a circular argument; globalisation has linked economies more, not less.
A slowdown in a region, especially one the size of the US, is sure to have some impact, the question is how direct an impact, and the quantum of the impact, the answer to which will also vary depending on which country in Asia we're looking at.
From a bottom up perspective, I have definitely been seeing more anecdotal evidence of rising demand from Asia itself.
There's no doubt luxury market sales have been tremendous. China is now one of the top five largest buyers of high end luxury goods in the world.
Insatiable demand from not only China, but Asians in general have been driving luxury watch sales.
Swiss made luxury watch sales are expected to grow by 15-20% per year, up from 8-12% over the past few years.
In my last trip to Hong Kong, I surveyed a few luxury watch retailers to see how their sales were doing. In most of these shops, their Patek Philippe displays were bare.
One sales person noted if they had more Pateks to sell, they would make more money! Apparently mainlanders had been snapping up any stock that were coming in.
Looking a little more down to earth, the textile sector is an interesting one to analyse.
Clothing is the often the top non-necessary expenditure.
The textile sector in China has taken a bit of a beating over the past couple of years because they expanded aggressively pre-quota and consequently have been left with significant overcapacity.
This capacity has been slowly taken up, a lot of it from domestic demand.
I was recently at the Canton fair in Guangzhou, probably one of the world's largest trade fairs.
Interestingly, talking to some of the exhibitors there, they have been seeing a significant increase in not only domestic but also Asian buyers.
Now some of these are because western manufacturers have set up buying offices either in HK or elsewhere in Asia, but some are Asian based demand. In particular, Middle East, Africa and Latin America transactions have been increasing in significance.
In my opinion, Asian economies are inextricably linked to global economies.
I think analysis that shows that Asian economies will completely decouple if we see a global recession is hopeful at best, completely misguided at worse.
On the other hand, Asian domestic consumption as a potential driver of future global growth is not a castle in the sky dream. In my opinion, it is a matter of time.
If you ask me whether it is strong enough to take up the slack for a US slowdown, yes, for a US recession no, and certainly not if we see both US and European slowdown.
On the other hand, I believe the recovery in Asia will be faster, than expected if we do see a slowdown.
Balance sheets (both government and private) are stronger than they have ever been in the past.
And most importantly, the growth potential from domestic consumers will remain as promising now as it will in the next few years, even if growth takes a backseat when some slack occurs in external demand.
The billion dollar (I use billion because a million dollars seems like nothing nowadays) question is whether Asia can decouple in the event we see a significant slowdown in the US economy.
I have been and remain quite bullish over the rising middle class and domestic consumption story in Asia.
It is clear that Asian consumers are seeing increasing discretionary income and are demanding better quality products, lifestyle and more choices.
However, whether this theme/trend is sufficient to offset a worse case scenario of a global slowdown, driven by a more significant than expected slowdown in the US economy is another issue.
Citigroup's Strategist, Markus Rosgen, recently wrote an excellent thought-provoking piece on this specific topic, debunking the fast becoming consensus opinion that Asia can potentially decouple and go on its own steam if other regions, or more specifically, the US starts to slowdown.
Nobody will argue against the fact that Asian domestic consumption is on the rise because Asia has become the manufacturing base for the world.
The key question is whether Asian demand has grown enough to absorb demand from a slowdown in their key customers.
From a top down perspective, it is difficult to see how slower demand from the US will not hit the Asian economies, especially the more export driven countries.
Some economists would like to argue that any slowdown in the US could be offset by strong growth in Europe, and consequently continue to drive export growth in Asia.
Advertisement
But there is still some correlation between European and US growth rates, albeit the correlation is not as significant compared to US and Asian economies in the past.
However, with globalisation, the correlation between different countries growth has risen not fallen, which makes complete decoupling trickier, if not wishful thinking.
Still, in my opinion, this is a circular argument; globalisation has linked economies more, not less.
A slowdown in a region, especially one the size of the US, is sure to have some impact, the question is how direct an impact, and the quantum of the impact, the answer to which will also vary depending on which country in Asia we're looking at.
From a bottom up perspective, I have definitely been seeing more anecdotal evidence of rising demand from Asia itself.
There's no doubt luxury market sales have been tremendous. China is now one of the top five largest buyers of high end luxury goods in the world.
Insatiable demand from not only China, but Asians in general have been driving luxury watch sales.
Swiss made luxury watch sales are expected to grow by 15-20% per year, up from 8-12% over the past few years.
In my last trip to Hong Kong, I surveyed a few luxury watch retailers to see how their sales were doing. In most of these shops, their Patek Philippe displays were bare.
One sales person noted if they had more Pateks to sell, they would make more money! Apparently mainlanders had been snapping up any stock that were coming in.
Looking a little more down to earth, the textile sector is an interesting one to analyse.
Clothing is the often the top non-necessary expenditure.
The textile sector in China has taken a bit of a beating over the past couple of years because they expanded aggressively pre-quota and consequently have been left with significant overcapacity.
This capacity has been slowly taken up, a lot of it from domestic demand.
I was recently at the Canton fair in Guangzhou, probably one of the world's largest trade fairs.
Interestingly, talking to some of the exhibitors there, they have been seeing a significant increase in not only domestic but also Asian buyers.
Now some of these are because western manufacturers have set up buying offices either in HK or elsewhere in Asia, but some are Asian based demand. In particular, Middle East, Africa and Latin America transactions have been increasing in significance.
In my opinion, Asian economies are inextricably linked to global economies.
I think analysis that shows that Asian economies will completely decouple if we see a global recession is hopeful at best, completely misguided at worse.
On the other hand, Asian domestic consumption as a potential driver of future global growth is not a castle in the sky dream. In my opinion, it is a matter of time.
If you ask me whether it is strong enough to take up the slack for a US slowdown, yes, for a US recession no, and certainly not if we see both US and European slowdown.
On the other hand, I believe the recovery in Asia will be faster, than expected if we do see a slowdown.
Balance sheets (both government and private) are stronger than they have ever been in the past.
And most importantly, the growth potential from domestic consumers will remain as promising now as it will in the next few years, even if growth takes a backseat when some slack occurs in external demand.
Labels: Asian currencies, weak dollar
posted by Kenneth | 12:20 PM
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