Emerging Asia set to weather the storm

The Chinese government’s determination to tighten monetary policy gradually, plus the absence of excessive housing inflation or complex financial leverage in the banking systems of emerging Asia, mean that the region has the most potential to weather the current market volatility, according to the latest global research from Baring Asset Management (Barings), the international investment management firm.

Andrew Cole, Director - asset allocation at Barings, explains: “We are confident about the resilience of emerging Asia - in particular the Chinese economy - and therefore continue to focus our investments in that region and in sectors that will benefit from Asian growth. Despite concerns about Chinese inflation, the authorities seem determined to move very slowly to tighten policy and China seems to be the one remaining untarnished growth story. Similar arguments apply to the rest of Asia. If the Fed continues to cut rates aggressively, it may spur even greater excesses in Asian markets.”

Globally, Barings expects growth to slow across the main Western economies as a result of higher credit costs and a reduction in credit availability to weaker borrowers. In the US, Barings expects growth to be below trend for at least a year.

Andrew Cole continues: “We expect the housing slowdown in the US to intensify over the balance of this year through to mid 2008. Prices will fall in absolute terms – perhaps as much as ten percent. We expect industrial growth to be positive and the economy should get some support from growth in capital expenditure and from exports. The key will be the consumer response to a fall in housing wealth. If the jobs market holds steady, our judgement is that the consumer will hold up and spending will chug along at a modest rate. If the employment market deteriorates, however, the recession risk increases sharply. In the meantime, we expect the Fed will most likely continue to cut rates on a slow but systematic basis in an attempt to sustain confidence. This will likely lead to a much weaker US Currency.”

In Europe, the UK has seen the most resilient economic data over the summer and stands out as the most robust economy, according to Barings. The housing market looks as if it is just peaking out and mortgage lenders are finally passing on the hike in market rates. Of all the central banks the Bank of England is the most hawkish, however the pressure is still on and Barings believes that another rate rise cannot be ruled out after the markets quieten down.

Andrew Cole continues: “We expect growth in Europe to slow from recent peak rates and fall back to just above trend. The housing markets in Spain and Ireland are likely to weaken further, but German exports to the East are expected to remain firm. The strength of the Euro however may have an impact on earnings in the year ahead. The ECB has probably completed its tightening through official rates and, given its interventions in the three month funding gap, appears to be shifting to a more dovish tack.

“We continue to look for buying opportunities in our favoured areas of Asia and resources, but are looking for evidence that the bad news from the financial sector is fully discounted in the markets. Our favoured sectors are still Materials, Energy, Technology and Industrials, while we are less positive on Consumer Discretionary, Staples, Financials, Healthcare and Utilities.”