International | May 01 2008
By Chris Shaw
Since the US economy has slowed the question for the world economy will be can Asia de-couple from the West and continue to grow strongly, so supporting the rest of the world while the American economy sorts through its issues. But as GaveKal point out there are really two kinds of de-coupling, the first being an economic de-coupling that it considers as basically a certainty, and the more questionable financial market de-coupling.
With a few months of the US slowdown now under the market’s belt a closer look at the question leads GaveKal to suggest economically Asia and the US are indeed growing further apart, as data from the Asian region continue to be positive as evidenced by recent strong industrial production data from Singapore and retail sales data from Hong Kong. This contrasts with further weak housing numbers in the US and generally poor data from Europe, highlighting the growing economic divide between the two regions.
In terms of financial market performance though the two regions have performed much more in line, though according to GaveKal the falls in Asian markets have been the result not of concerns over the economic outlook as is the case in the West as growth in Asia continues to look solid but has been due to inflation fears, driven largely by surging food prices.
Central banks such as those in Russia and China have been forced to tighten policy to deal with the increases in prices being experienced and GaveKal suggests there has also been evidence of consumers reducing spending. Further complicating matters has been poor policy action such as export bans and price controls, all of which has played on investor sentiment.
In GaveKal’s view investors should be watching for signs of any rolling over of food prices, which appears under way in the wheat market at least. As well, the US dollar is now showing some signs of life and this is likely to have a dampening impact on commodity prices generally, meaning the food price concerns may turn out to be a market scare that doesn’t actually last too long.
If this turns out to be the case and inflationary pressures in Asia turn down as a result the GaveKal view is a large weight will be removed from Asian equity markets, setting the stage for a reversal of recent weakness. This implies a de-coupling with Western financial markets, meaning Asian markets are most likely to outperform in coming months.
