Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Kim Lee, manager of the CF Canlife Asia Pacific Fund, gives her view on the macro outlook for the Asia Pacific region.
Reform has been the buzzword in the Asia Pacific region this year. A raft of stimulus packages introduced by China, India and Korea all aim to increase investment, consumption and economic growth. Indeed, it is safe to say Asia Pacific is on a stronger footing than it was 12 months ago, when the region was blighted by currency crises and concerns of a sharp slowdown in growth.
The outcome of all this has been improved investor sentiment in the past quarter and a significant uptick in investment inflows. In China, where economic reforms have been numerous, we have seen a greater degree of stability in the economy and a series of catalysts for further market growth. The main focus for the final quarter of 2014 is the implementation of mutual market access, which is the link-up between the Hong Kong and Shanghai stock exchanges, as well as the reform of state-owned-enterprises, which will see the government open up many of these firms to private investment.
More recently, there have been concerns about China’s inflation rate and possible deflationary pressures as domestic demand weakens. However, the bigger point of focus in the country is gross domestic product (GDP) growth and the exact trajectory that this will take. In that respect, there is an expectation that Q3 growth in China will be somewhat poor. While growth this year is targeted at 7.5%, it is believed that it will be 7% in 2015 and that 6% is a more realistic and sustainable long-term growth level.
Stimulus programmes have also been major themes in India and Korea. Narendra Modi, the prime minister of India, has sought to increase investment and boost growth through a wide range of reforms. This resulted in GDP growth of 5.7% in the second quarter, which was above expectations. A key factor in India’s growth plans has been foreign investment in the form of a five-year, $20 billion commitment from China that also involved access to the Chinese market for Indian product manufacturers, and a five-year, $35 billion commitment from Japan.
For Korea, the reform measures took markets by surprise and received a warm welcome. Three main policies, known as Choinomics, have been tipped to lead to a period of ‘big bang expansionary growth’. The objective is to kick-start the country’s economy through a series of measures that include increased government expenditure, relaxed mortgage lending rules designed to rekindle a slowing property market, and tax incentives for companies that give wage increases to employees and pay higher dividends to investors.
Looking forward, the next step for China is its plenary meeting in October, where the primary focus is expected to be legal and judicial reforms, while the country’s target GDP growth rate is likely to be set in November’s Central Economic Working Conference.
With an improved outlook for the economy, Asia Pacific should experience a rally in financial markets over the coming months. From a country perspective, the fund continues to have a bias towards China and Hong Kong, although at a lower level than in the past, followed by Korea and India.
More importantly, the portfolio is positioned to take advantage of several themes that are likely to offer attractive growth to investors. Leading the way is the linking of the Hong Kong and Shanghai stock exchanges, which is expected to have a positive impact on markets. Other major themes include: China’s state-owned-enterprise reforms, which will see many state-owned businesses become partially privatised in order to attract investors; logistics and e-commerce, to take advantage of a market that has the potential to surpass the size of the US; and government initiatives in Korea aimed at revitalising the domestic sector.
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