Asia’s economic squall will pass

Singapore Supertrees and Skywalk © iStockphotos
Singapore is the canary in the regional coal mine

“It keeps getting worse” for South Korea, say Moxy Ying and Heejin Kim on Bloomberg. The US-China trade war has hit exports hard and Seoul is also embroiled in a separate tariff dispute with Japan. Its Kospi index is inching ever closer to erasing this year’s already modest 4% gain. Korean stocks comprise almost 15% of the MSCI Asia ex-Japan index, second only to China. No wonder the index has risen by just 10% this year, compared with an almost 16% jump for global equities.

As an “export powerhouse” Korea’s economy has proved particularly vulnerable to the global trade slowdown, says Robert Carnell of investment bank ING. “The Korean economy may actually be in a recession right now.”

Korea is not alone in its travails. Singaporean exports collapsed by 17.3% in June on a year before, notes Agence France-Presse, the fastest decline in more than six years. As a highly trade-dependent economy, the country is often “the canary in the coal mine” presaging a broader regional slowdown, says Song Seng Wun of CIMB Private Banking.

“Headwinds from cooling global demand and US tariffs” are “likely to intensify” in the coming months, according to Capital Economics. Growth in emerging Asia looks set to “slow from 5.5% last year to 5.0%” this year and next. Many countries in the region will experience their “weakest growth in a decade”.

A bumpy outlook

The short-term outlook may be bumpy, but the “passing trade squall” distracts from many of the long-term structural trends favouring Emerging Asia, cautions Gordon Smith of Killik & Co. The region plays host to 60% of the world’s population, including 1.4 billion people in the crucial 20-39 age range. Rising rates of urbanisation will fuel the expansion of the middle class. “Over 83% of middle-class consumption growth over the period to 2030 will come from Asia.” The days of the region playing copycat to Western technological innovation are also drawing to a close. As Hugh Young of Aberdeen Asset Management has pointed out in the Financial Times, emerging Asian countries are increasingly taking the lead.

China invested more in renewable energy in 2015 than the US, Japan and Britain combined and is already the world’s largest market for electric vehicles. India is assembling a digital database of 1.1 billion citizens that could help launch the “next generation of digital financial services”. Recent underperformance means that there are bargains to be had. The South Korean market is on a cyclically adjusted price/earnings ratio (Cape) of just 12.4. Two regional trusts worth researching are the Pacific Assets Trust (LSE: PAC) and the Schroder AsiaPacific Fund (LSE: SDP).