Emerging Asia is a better place to be

In a recent article, we have been highlighting that growth in China is slowing which is nothing new but more important is that we see it as a long term positive factor.  The Chinese economy is the second largest economy in the world and has been of the strongest contributors to global growth; it is obvious that any kind of weakness can have a deep impact on global growth. While we do not want to underestimate the potential negative consequences of a China slowdown, we believe that it is also important to keep matter in proper perspective. China is heading into a long period of restructuring and reform both socially and economically which is vital to achieve a long term and sustainable economy.  Moving away from a manufacturing based economy to service and consumption based economy will also reap longer term benefits for the country.  Service sector employment growth has already surpassed export and manufacturing growth and the adjustment process is still in fully swing.

But is China’s structural change in its economy negative for other Emerging Markets?

Emerging Countries account today for 40% of global GDP and over 65% of global GDP growth whereas in 1997 it accounted for 21% respectively 27%. This is primarily explained by the size of China but it is also reflecting on the increasing importance of other emerging market countries as well. China has an important role to play in the development of the Emerging Markets and especially in Asia. In fact most Southeast Asian countries have be benefiting from China’s growing investment abroad. 

While investors have been focusing much on FDI as an indicator, very little have been mentioned on China’s Overseas Direct Investment (ODI) – money that China invests outside of China. In fact China’s ODI surpassed FDI in 2014 for the first time. Although a significant amount has gone to developed countries such as the US, but China’s investment in the emerging markets caries a larger weight in smaller EMs and as such has a greater impact on their GDP growth.

In order to counteract higher manufacturing cost and weak manufacturing at home, China is shifting its manufacturing to the ASEAN countries, this is especially true for example in Thailand. Indonesia just received in September USD 3 Billion from the China Development Bank that will be utilized for infrastructure projects. In addition, recent export data from the Philippines to China is still indicating positive trade between the two countries.

Generally speaking, Emerging Asia is a better place to be

As commodity takers, they tend to profit from lower commodity prices. Flexible exchange rate policies and lower dependence on foreign debt will also help the region from falling into another 1997 Asian Style Crisis. Areas of special interest for us would include India and Southeast Asia. They are benefitting from structural reforms, renewed investment cycle as well as strong domestic demand.

Our Southeast Asia specialist, who has been there a couple of weeks ago, has come back with a strengthened positive view, especially on Philippines and Indonesia. He likes to play the consumer stocks. The Philippines with a clear overweight in our funds has solid corporates, a positive, investment cycle momentum and a large domestic demand (even larger than India). One potential headwind ahead could be the March 2016 elections though but for the time being it too early to indicate the outcome. Indonesia’s comsuptions stocks have been oversold due to negative sentiments and represents excellent opportunities to pile up in certain stocks again.

Pioneers in Emerging Markets Equities since 1994 As a pioneer in Eastern Europe, Raiffeisen Capital Management* launched the first Emerging Europe equities fund in 1994.  Since then we gradually extended our competences and added China in 2000 and Southeast Asian countries in 2009. Today we successfully manage Global Emerging Markets offering to our investors’ local, regional and global funds. Our focus is bottom-up value investing.

* Raiffeisen Capital Management stands for Raiffeisen Kapitalanlage-Gesellschaft m.b.H.