Can Asia withstand a slowdown in the west?

Asia is set for strong long-term economic growth

Historically most Asian economies have been highly dependent on western demand. Whether it’s the latest electronic gadget, a new car or an updated wardrobe, Asian factories and companies produce many of the goods so desired by western consumers. Therefore, a slowdown in the west has usually meant a sharp drop in Asian growth. However, we believe this relationship may finally be breaking down and that Asia is now showing signs of decoupling from the west.

This is not to say that the decoupling process will take place overnight. Asian manufacturers do still rely to a large extent on western demand and therefore a slowdown in the US and Europe will still have an impact on Asian factory output and Asian economic growth.

However, growing domestic demand for Asian-made products is increasingly making up for weakness abroad. In July, for example, Korean exports to emerging markets grew by an impressive 30% compared to a year earlier.* Chinese exports also continued to grow sharply in July despite a drop in demand from the west. Much of this continued strength in exports is attributable to demand from Asian consumers.

Economic fundamentals are stronger in the east

Unlike the highly indebted western economies, Asian governments have kept their public finances in a healthy state. Many Asian economies have far lower public debt levels compared to the US or most European countries, while budget deficits are also largely under control. Asian governments are therefore in a strong position to support economic growth and boost domestic consumer demand through tax cuts and/or increases in borrowing.

Therefore, it is not implausible that Asian governments will take action to further stimulate consumer demand from within the region to provide a cushion for Asian exports. Rather than being just a workshop for the west, Asia is increasingly becoming a workshop for itself.

Asian stock markets look attractive

Following recent weakness, many Asian stock markets now look attractive on a long-term basis. Share prices are particularly attractive compared to company profit forecasts for the next 12 months. Asian companies also benefit from solid balance sheets and are supported by much better economic prospects than in the west, so the current market weakness may provide an excellent entry point for investors that want to share in the region’s future growth potential.