Is Asia’s Economic Rebound Sustainable?

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By Tony D’Altorio

The United States is fretting about the possibility of a double-dip recession. Europe is looking for signs of the next sovereign debt default crisis. And Asia…

Well, Asia has no such worries. This year, economies from the Indian subcontinent to Australia – though not Japan – will expand by 8.6%, their fastest pace in 20 years!

Nations like Indonesia and South Korea are even in better shape than before the financial crisis hit. India’s economy, growing at more than an 8% rate, has barely paused for breath and China keeps moving at a 9-10% pace.


Naoyuki Shinohara of the International Monetary Fund said in a recent speech:

For the first time, Asia’s contribution to a global recovery is outstripping that of other regions. Rather than being dependent on a narrow export-driven recovery, domestic demand – particularly household consumption – is reinforcing Asian growth.

Investors can experience some growth as well if they just pay attention to the rising trend.


1997-1998 Asian Crisis


Asia went into the recent financial crisis in solid shape. After its own 1997-1998 drubbing, most economies there built up big current account surpluses.

By the time the credit markets froze in 2008, those countries accounted for over 60% of global foreign exchange reserves. China alone had more than $2 trillion.


Asia also cleansed its weak banking system and regulated prudently. By rejecting so-called sophisticated financial practices – and despite US criticism for that decision – Asia saved itself a lot of grief.


It therefore had the financial firepower and structural soundness to put towards effective stimulus measures after the west fell. And the various governments could influence their banks and funnel credit into their economies more easily.


Additionally, Frederic Neumann of HSBC points out that Asia can afford to borrow even as western economies struggle to pay off their debts. After a decade of austerity, “Asians are now in a position to buy decoupling [from the US and Europe] on credit,” replacing any shortfall in western demand with domestic expansion.


Inter-Asian Trade


Asia can also rely on exports, which have risen outside of the US, Europe and Japan.

According to Daiwa Securities, exports to those countries from the top 10 Asian countries – excluding Japan – fell from 45.5% of its 1997 total to 36.4% in 2009. But the developing world picked up the slack, including the oil exporters of the Middle East.


My colleague, Louis Basenese, recently highlighted South Korea – a big producer of electronic goods, machine tools and cars – as a great example of such growth.

More than 40% of the nation’s exports go to Brazil, Russia, India and China. And that gives South Korea a decent shield against any renewed downturn in the west.


Asian Consumers and China


Finally, Asia is quite simply enjoying a structural pickup in consumer demand.

Car sales in China alone are seven times what they were a decade ago. And in that time, sales of mobile phones in India have risen 250-fold to about 450 million.

Over the past year, imports across nearly the entire region have outstripped exports. Asia’s rapidly growing middle class is absorbing a greater proportion of Asian production.


Much of that stems from China, the region’s sturdiest engine of growth. It continues to push its fellow Asian economies higher with it, along with a number of commodity producing countries like Brazil.


Taiwan, South Korea and Japan have begun to heavily rely on China’s demand for industrial goods, heavy equipment and consumer goods. Meanwhile, Indonesia, India and Australia continue to feed China raw materials.


Overall, Asia still relies on western economies to some degree, but it has become much more self-sufficient in recent years. The future looks bright, thanks in large part to its swelling middle class, according to Peter Elston of Aberdeen Asset Management Asia:

Of course, Asia continues to be impacted by western demand. But it is increasingly playing less of a role. It’s a fairly simple story, really. Most of Asia is still on a GDP per capita of less than $4,000. That means there is incredible capacity for this region to grow.


Asian Investments


Investors can make that bright future their own through ETFs such as iShares MSCI South Korea (EWY) and iShares MSCI Indonesia Investable Market Index Fund (EIDO).


Or, to focus on specific sectors, they can consider two funds from EGShares: China Infrastructure Fund (CHXX) and India Infrastructure Fund (INXX). In addition, consider China sector funds from Global X Funds, especially Global X China Consumer (CHIQ).

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