Market Views: Will Southeast Asia see a slowdown?
As the trade war between China and the US continues, countries in Southeast Asia have increasingly shone, amid positive gepolitical and economic news.
Chinese manufacturers facing tariffs in the US have been quick to move production to Vietnam, Cambodia and Thailand. The trend had initially started as wages rose on the mainland and gathered steam as it became evident that the logjam between the world’s biggest economies wasn’t going to be solved anytime soon, current exuberance over the outcome of the G20 summit in Osaka on June 28 and 29 notwithstanding.
The Southeast Asia region has other appeals too, not least its so-called 'demographic dividend', with most countries in the region possessing youthful populations that can work for decades to come.
The economic output of Southeast Asia and India is expected to grow by 5.2% and 7.3% on average between 2019 and 2023, faster than the growth rate in 2012-2016, according to the Organisation for Economic Co-operation and Development.
While fears of an economic slowdown in China hang over the region, policymakers across Southeast Asia appear better set to react to a tailing off in its growth, unlike the Asian financial crisis of 1997, according to the Asian Development Bank. Many have ensured their exchange rates have room to manoeuvre, and they have tightened their policy rates to guard against large and disruptive currency movements, the development-focused bank said.
But will a China slowdown have a greater effect than anticipated? Or will countries in Southeast Asia continue to demonstrate their growth and increasing resilience? AsianInvestor asked five industry specialists for their takes.
The following extracts have been edited for brevity and clarity.
June Chua, head of Asian equities
Harvest Global Investments
There will be beneficiaries within Asia as trade diversion from China takes place. We have seen low valued-add factory jobs moving to countries like Vietnam, Bangladesh, and Asean, and some higher value-add jobs are starting to migrate, too. Asia still offers strong long-term structural growth opportunities with its attractive demographics.
Asia's interregional connectivity and logistical advantage are imperative to its status as the world’s manufacturing center. A major Korea electronics company is the largest investor in Vietnam, helping the manufacturing sector move up the value chain. Bangladesh is already the world’s second largest garment maker. This was happening before the trade war and is perhaps accelerating now that companies face increased tariffs for producing in China.
Most recently, a major US technology company reportedly asked its major suppliers to assess cost implications of moving their production base from China to Asean. We also see Vietnam’s export to US rising steadily since the trade war. We hold the constructive view that Asean and Frontier markets will benefit from the trade situation and prosper.
Ruchir Desai, fund manager
Asia Frontier Investments
South Asia is not affected as much by the trade war as exports are still sitting at a low percentage of economic output. And one economy which could be benefiting from increasing trade tensions is Bangladesh as it has seen its exports, which are predominantly garments and textiles, rise by 9.1% in 2019.
Given the country’s attractive demographics and increasing investments in infrastructure, the country is expected to record GDP growth rates of 7.5%-8% for the rest of the year, which is one of the fastest globally. Other South Asian nations in our universe like Pakistan and Sri Lanka should report GDP growth rates of 2.5% to 3% as they are currently going through a macro adjustment phase.
Vietnam has also seen exports rise by 7.3% in the first half of 2019. This should not come as a surprise as the country has a large young workforce, political stability and low wages which is leading to a rise in foreign direct investments into the manufacturing sector with most of these investments focussed on putting up export capacity. Vietnam's economy should be able to post GDP growth rates of around 6.5% in the second half of 2019.
Other Southeast Asian nations within our universe such as Cambodia, Laos and Myanmar should also post GDP growth rates of 6% to 6.5% for the rest of 2019 due to rising consumption and infrastructure investments.
Ray Farris, south Asia chief investment officer
Crédit Suisse
A favourable outcome for the G20 makes us constructive on the Chinese and Indonesian equity markets and on EM Asia sovereign and quasi-sovereign credit.
Our base case scenario in which the US and China are back onto a path for a trade agreement with reductions of tariffs by the fourth quarter would spur a recovery in trade and economic growth in the region in the short term.
Better growth prospects should combine with the 25 basis point cut by the US Federal Reserve that we expect in the July FOMC meeting. This will stoke a particularly benign investment environment of stronger global risk appetite and a softer US dollar in the coming months.
Lower US yields and dollar weakness should push funds into higher yielding emerging market-bonds, particularly in Indonesia where yields are relatively high. This should help support the Indonesian rupiah, facilitating policy rate cuts by Bank Indonesia that should benefit equities.
Emerging market debt team
Investec Asset Management
While inflation remains subdued across the region, there were a few modest upside surprises, for instance in Korea and Indonesia.
Growth remains mixed across the region, with Purchasing Managers Index (PMI) data weakening in the more trade-reliant countries (like China, Taiwan, Korea) but strengthening in the more domestic-orientated economies (e.g. India, Indonesia, Philippines).
Export data was also weak in the Philippines and growth was lower than expected. The central bank remains dovish and we are moving into a period of weaker seasonal current account performance. We retain our underweight in the peso. In Malaysia, GDP growth was slightly higher than expected. However, we remain underweight in the country’s bonds and currency given the risk of these assets being removed from major bond indices on FX hedging/liquidity grounds.
The fiercely contested Indonesian election saw a comfortable win by incumbent president Jokowi Widodo, resulting in a rally in the rupiah and bonds. We retain our underweight position as we see little improvement in the current account and expect more tolerance from the central bank for currency weakness post-election.
In India, incumbent prime minister Narendra Modi secured a sweeping victory in the general election, lifting the Indian rupee and bonds somewhat. We think it will be challenging to re-ignite the reform agenda and remain neutrally positioned in Indian rupee and local bonds.
Avinash Vazirani, fund manager, Indian Equities
Jupiter Asset Management
Modi’s government will continue to focus on good governance and will double down on reforms from here. An improved score in the World Bank’s Ease of Doing Business rankings should continue to attract more business. In the past few years we have seen several significant structural changes, and we believe the benefits of these changes have not yet been fully absorbed.
However, short-term disruption could come from a slowdown in growth from a high base and stagnant rural incomes due to below-average rains and lower commodity prices. But such incomes have been largely resilient from significant progress on sanitation, electrification and implementation of an improved benefits system, with a country-wide health insurance system also being rolled out.
Paul Hsiao, Economist, Global Economic Strategy
PineBridge Investments
From a macro-economic perspective, we expect India to remain one of the fastest growing economies in the world – with a growth rate even faster than that of China. We forecast growth to trend around 7% in both 2019 and 2020 supported by a proactive fiscal stance and accommodative monetary policy.
The re-election of Narendra Modi should be seen as a plus for markets and additional reform is needed to unlock India’s growth potential. Corporate sentiment on India has improved under Modi’s first term as the government has taken initiatives to improve ease of doing business and strengthen legal protections.
There are lingering challenges that face India in the second half of the year. The Modi 2.0 administration faces its first hurdle later this month when it unveils its 2019-2020 budget. Investors want some clarity over how the government can realistically make up the slowdown in tax collection from last fiscal year while maintaining a proactive fiscal stance since a continuation in infrastructure spending is a driver of private investment being “crowded-in.”
That said, India has a lot of positives going into the second half of the year. The dovish pivot from the Federal Reserve has increased the odds for a weaker US dollar, which tends to be a positive for Indian assets. The Reserve Bank of India has also reinforced guidance for lower policy rates, which would be another boost for Indian markets.