Asia well placed to withstand economic slowdown

Kathryn Matthews, Asia CIO for Fidelity International, says an economic slowdown in the US will have an impact on Asian profits, but despite current volatility in the market, GDP growth in the region should remain high, albeit off recent peaks. The forecast of around 7.5% GDP growth in 2008 for the Asia ex Japan region is currently five percentage points more than Japan, the UK and Europe.

Ms Matthews says there are several strong props to the Asia economy. Firstly, while people in the West are heavily indebted, national savings levels in the region have increased five-fold in the last 20 years. At the same time, consumer debt levels have fallen dramatically.

Secondly, corporate debt levels are much lower than in the recent past - a decade ago the debt to equity ratio was more than 80% whereas the forecast for 2008 is below 20%.

Thirdly, the financial position of most Asian governments also looks good. Foreign exchange reserves are healthy and their debt levels are looking better than the rest of the world.

The growth in Asian exports to the US have already slowed sharply from 18.6% in March 2006 to just 3.1% in March this year. But this has been partly offset by exports to commodity producers. These have risen from 29.5% to 37%, while exports to the EU are up from 16.9% to 19.7%. Domestic demand has also remained firm.

"But, the risk lies with inflation which has spiked this year, primarily due to rising food prices. Many governments have been willing to put up with the inflation in the short-term, using pricing policies and subsidies to protect the man in the street." continues Ms Matthews.

"Recently, however, there has been an increasing realisation in some countries that inflation won't go away quickly and governments have started to take some action by raising interest rates or through other more restrictive measures."

Ms Matthews concludes "Asia's contribution to global GDP was higher than both the US and Europe in 2007. Moreover, there is increasing breadth of investment opportunity, particularly after the large number of IPOs seen in recent years. While inflation remains a concern in the short-term, the long-term picture for the region is very positive."