Asia Has the Wind at its Back

08/24/2011 10:30 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Strong export numbers and rising domestic demand mean Asia’s growing economies are less tied to the fortunes of the developed world than they were even a couple of years ago, writes Yiannis Mostrous of Global Investment Strategist.

As global markets plummet, investors are looking for reasons for the sudden market turmoil. Of course, one could attribute the current market turbulence to any number of factors.

The only real question is whether the global economy will plunge into a recession, this year or in 2012. Unfortunately, no one can say definitively whether a recession is in the cards.

If a recession occurs, then investors should sell off their emerging-market stocks, even though these names have already dropped from last year’s highs. But if the global economy manages to avoid a recession, investors should accumulate emerging-market stocks during this period of weakness.

Emerging economies, particularly in Asia, are entering this slowdown with a wind at their back.

The resilience of China’s economy will be crucial bellwether for Asian economic growth. Although the Chinese economy won’t be unharmed by slowing growth in the US and EU, the mainland is in a good position to sustain solid growth.

The country still relies on net exports to drive the economy, but domestic demand is increasing. Exports aren’t the only pathway to economic growth for China.

But most important, China’s government has enough fiscal firepower at its disposal to ensure that the country’s economy won’t be upended by global economic weakness.

We expect that Asian governments, led by China, will implement fiscal measures to support their economies, as they did during the Asian Financial Crisis of 2008-2009. These measures were successful then, and should be successful again in the event of a global recession.

It’s worthwhile to note continued strength in Asia’s exports in July:

  • South Korea’s exports rose 27.3% year over year in July, more than doubling June’s growth rate of 13.6%.
  • Taiwan’s exports rose 17.6% year over year last month, up from 10.8% yearly growth in June, driven by rising demand from China.
  • Finally, strong demand from the EU and Japan led to a 20.4% year-over-year increase in China’s exports.

Although this data is backward-looking, it comes amid anemic economic growth in the US—a very encouraging sign for Asia. Entering an economic slowdown or recession with ample firepower is always a good thing.

Low rates of future global economic growth are a foregone conclusion. This means that investors will want to buy quality assets that offer growth and yield.

Although one can find such assets in many markets, Asia offers investors the total package, and the region should be the first stop in the hunt for long-term bargains.

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