Analysts: Naman Agarwal and Devika Jhunjhunwala
Region Recommendation: A-
US-China trade war is affecting global equities, currencies and prices but new market opportunities will open up in some Asian countries.
Despite the emerging markets rout, macro fundamentals of most Asian countries remain strong with steady inflation and high GDP growth rate.
Asia-Pacific accounts for two-fifths of global GDP shares with China, India and Japan representing 70% of the region’s GDP. Unemployment rate has been either stable or decreasing.
Inflation rate illustrates an increasing trend while Japan’s aggressive monetary policy failed to bring positive inflation rates.
Cloud market predictions show expansion in technological sector in the region. India continues to attract tech companies.
Asia is witnessing a rapid growth in mobile and internet penetration which has increased the prospects of e-commerce.
There is an increase in domestic demand and consumption due to an increase in middle and affluent class.
Trend #1 – Consequences of the Trade War
The ongoing US-China trade war creates major concerns for investors as Asia’s economic conditions face uncertainty at this point. US has imposed tariffs on more than $250 billion worth of Chinese goods, resulting in a decline of Chinese equities and depreciation of the Chinese Yuan. US also plans to increase its tariffs on automotive imports by about 10 times, leaving Japanese economy at a risk since automobile accounts for 80% of US deficit with Japan.
The impact of trade war has been significant across Asia-Pacific countries, keeping commodity prices, currencies and global equities low. Indian rupee and Indonesian rupiah has plummeted. If currencies continue to fall, we could expect interest rates to increase, further causing possible financial stress and poor economic performance in the region. We expect economics dynamics in Asia-Pacific could change with disruption in global supply chains and price instability. On average, stock indices in Hong Kong, Japan and Australia have been ending low for the past months since the trade war. Yet, trade war could bring positive light to some ASEAN countries. Following uncertainty in China’s economic situations, some companies in the fashion industry have already invested and established a spot in Cambodia and Vietnam’s markets. With tensions between US and China, Hong Kong also sees a chance to begin developing a new market relation with other ASEAN countries. In fact, trading within Asia has strengthened over the years as China and South Korea advance to develop strong trade relations with ASEAN areas and India respectively.
Trend #2 – Currency Crisis in Emerging Markets
The trade-wars between United States and China coupled with the Fed’s rate hike have cajoled global investors to chase greenbacks instead of emerging market currencies. The currency crisis began in Turkey and Argentina but spread to Brazil, India, South Africa, Russia, Indonesia, and Philippines. The Indian rupee plummeted to an all-time low of 72.97 against the USD and has lost 13 percent of its value. Since April 2018, the Reserve Bank of India (RBI) has spent around $25 billion along with increasing interest rates by 25 basis points in a futile attempt to stabilize the currency. Depreciating rupee and rising oil prices have widened the current account deficit which is further expected to widen to 2.5 percent of the GDP. Depreciating rupee has also dented market sentiments. The S&P BSE Sensex fell 500 points below its crucial support placed at 38,000 while the Nifty dropped 100 points to fall below 11,400. The Indonesian rupiah slumped to the lowest level since the 1998 Asian Financial Crisis. Against the dollar, the rupiah dropped to 14,933 and lost 9% of its value. The benchmark Jakarta Composite index fell 3.8% to 5683.5, its biggest one-day drop since November 2016. Having said that, India and Indonesia have many instruments to stabilize their currencies. The RBI is expected to have two more interest rate hikes. Furthermore, it has an excess of $400 billion in reserves. According to a State Bank of India report, the RBI can sell an additional $25 billion to curb the currency fall. Finance Minister Jaitley said that the government will take measures to reduce ‘non-necessary’ imports and ease overseas borrowing norms for the manufacturing sector. These measures should stabilize the Indian rupee. Indonesia has also taken several steps in response to the market rout. Bank Indonesia has increased interest rates four times by a total of 1.25 percentage points and has drained foreign reserves by almost 10 percent. The government has also taken steps to curb imports and maintain a current account deficit of 3 percent of GDP. It has decided to postpone or restructure its $25 billion 35,000-gigawatt electricity project which relies on imported components. This move would save around $8-10 billion in import costs. Moreover, the government has ordered mining companies to repatriate their export earnings to bolster the country’s dollar supply. The IMF has backed Bank Indonesia’s policy measures saying that they were appropriate to reduce volatility.
Trend #3 – Promising Economic Growth
In PPP terms, Asia-Pacific region takes up 40% of global GDP shares with its global output rising to 42.6% in the last quarter. China, India and Japan economies made up 70% of Asia-Pacific global GDP shares. Overall unemployment in most parts of the region has declined, showing promising signs on the labor force. Japan kept a low unemployment rate at 2.2%. Despite a decrease in GDP growth compared to last year and tensions due to the trade war, Japan economic conditions appear promising. The economy is witnessing more demand from its domestic market. Import rates increased at a rate of 3.9 % in the last quarter and at a rate of 0.8% for exports. The country continues to see an increase in real consumer spending and business investment at annual rate of 2.8% and 5.2% respectively.
ASEAN countries such as Cambodia is also growing relative to other years with a steady GDP growth rate and unemployment rate. Hong Kong economic conditions stood out as well. After a slight drop in GDP growth in the latest quarter, Hong Kong’s growth rate is expected to improve as its merchandise exports tripled since last year. Adjusted unemployment rate also reached the lowest at 2.8% over the past 2 decades. Within the years, Hong Kong remained in the strong strategic position worldwide, proving itself as one of the largest exporter of services and merchandise, and investor of FDI stock. Trade war is expected to open up more markets and new opportunities for Hong Kong economy.
Trend #4 – Inflation trends
Inflation in Asia-Pacific region has been increasing, especially driven by soaring food and gas/fuel prices. China’s CPI stood at a record of 2.3% as pork prices climbed sharply due to the trade war and supply shock from African swine fever. On average, inflation rates in ASEAN countries have been kept within the range of 2.5 to 3%. Japan’s short-term interest rate has been maintained at -0.1% for an extended period of time. Last year, the country applied aggressive monetary policy in an attempt to stimulate inflation. Alongside negative interest rates, the Bank of Japan (BOJ) has purchased massive assets. Yet, inflation rates have still been low in the country. In the following years, monetary easing is expected to continue, further promoting economic activity in the country. Japanese bond yields as well as yen have fallen within the months as BOJ continues to keep bond yields under 0.1%. Within the next few years, we expect to see no or little adjustment in the current monetary policy as Japanese economy strives to reach its targeted inflation rates.
Trend #5 – Rise in technology
The digital economy in Asia-Pacific is blooming with a drastic increase in internet usage such as e-commerce, online media and cloud marketing. However, information technology stocks have dropped this year compared to previous year in Asia excluding Japan. Yet, Japan’s IT shares are advancing with stock demand for videogames companies such as Sony and Nintendo. Asia-Pacific countries such as China, India and Singapore have also been major hotspots for data centers later in the year. Within 3 years, public cloud growth in China could reach up to $2 billion while 25% growth rate is expected in India’s local cloud market. India’s mobile phone market is one of the fastest growing markets, attracting many multi-billion tech companies such as Samsung Electronics. This South Korean company has invested in a manufacturing phone factory in India, showing promising future in the technology industry in the country. As many Asia-Pacific regions transition rapidly into the world of technology, investment in this sector could open more doors and bring favorable results.
Robotics - Buy
In 2017, Asia-Pacific region saw an surge of robotics in manufacturing industry, accounting for 65.0% of the world’s total industrial robot usage. This growth in artificial intelligence is forecasted to continue with China, Japan and Korea leading the technological wave in the region this year. In 2018, China’s industries see a huge dependence on robots in semiconductor and battery efficient goods, pushing robotics demand forward at an increasingly rate within the next few years. The growth in demand for industrial robots in the country was 58.0% in 2018. Usage of robots in manufacturing and services will boost the total sales up to $6 billion relative to previous year. With artificial intelligence becoming a hot topic across many Chinese companies, robotics industry has a very promising future to drive up economic growth and productivity in the country.
In Japan, technological developments are blooming ahead of the Olympics as drones and robots are taking control over tightening security services throughout the event. Industrial robot demand in Japan reached $2.6 billion in 2016 with an expected double in increase within the next three years. With China being Japan’s main robotics export partner, the country’s robotics production is expected to grow by 10.0%, reaching $9 billion in 2018. Japan now contributes to 52.0% of the world’s supply of industrial robots. Asia, overall, has the highest robot density this year with Korea, Singapore and Japan being global leaders in this category. These technological advancement in the region are opening up more opportunities in the Asia-Pacific robotics market.
E-Commerce - Buy
Rapid mobile phone adoption and rising internet penetration have had a positive effect on Asia’s e-commerce industry. E-commerce users in Asia are expected to exceed the 2 billion mark by 2022. Furthermore, strong economic growth, rising middle class, and increasing consumer confidence will lead to a growth in e-commerce sales.
In India, the e-commerce market is expected to grow by 20.2% per year and reach $52 billion by 2022. This is largely due to the growth in India’s internet users which are expected to increase to 829 million by 2021 from 446 million in 2017. The government also helped propel this growth. Since 2014, it has launched Digital India, Skill India, and Make in India initiatives which have positively impacted the e-commerce sector. In Australia, a record $21.4 billion was spent on online goods in 2017, an 18.7% increase over 2016. By 2020, one in every 10 items is expected to be purchased online.
The outlook for the e-commerce sector in Indonesia is also very positive. Smartphone adoption in Indonesia is expected to hit 67.0% by 2020. Furthermore, Indonesia has 130 million internet users with growing accessibility of mobile internet. The growth in mobile usage and penetration is due to the emergence of a more affluent middle class. This has enabled retail e-commerce to grow 31.1% in 2017 to $1.349 trillion. 41.0% of goods and services bought in Indonesia are purchased online. The country expects the market to grow at an annual rate of 50.0% to $130 billion. The government sees huge upside potential in this space and now permits 100.0% foreign ownership of e-commerce businesses.
India ranked first in the Global Consumer Confidence Index in Q1 2018 with 130 points. Indonesia finished third on the Global Consumer Confidence Index with 127 points. The index is seen as a strong indicator of future consumer spending. India’s GDP/Capita increased by 12.7% while that of Indonesia increased by 4.0%.
The increased penetration of mobile phones and internet coupled with a growing middle class, increasing consumer confidence, and favorable government policies make e-commerce a very favorable sector in Asia.
Healthcare - Buy
With the technological advancement, medical industry in Asia-Pacific is expected to see a 11.1% growth this year. The region’s healthcare expenditure reached $230 billion in 2016, with more resources being poured into R&D of clinical devices and techniques going forward in 2018. The growth in the industry will reach up to $517 billion in the year as Asia’s economy addresses shortages in hospital facilities and workers. There is a growing opportunity to invest in the hospital sector of the healthcare industry, especially in China. 25.0% growth in healthcare industry in China has been predicted going forward in 2018. Consumers’ spending on healthcare services have generally been rising across the region. Medical industry in Thailand, Malaysia and Japan are rapidly expanding with more foreigners seeking for better medical treatment and care in these countries. Local demands are pushing more expansion and improvement in the industry. Japan’s healthcare expenditure is expected to rise with technological development in healthcare infrastructure particularly for the aging population. Digitalization in the industry is a key driver to the growth of healthcare by 20.0% in the overall region throughout the on-going year. With changes in the dynamics of the Asia’s population, the outlook in the healthcare industry seems promising.
Automobile - Hold
Asia’s vehicle sales saw a 2.0% increase in Q2 2018 compared to that in Q2 2017. China and Japan continue to lead in the region’s automobile industry. Within the next few years, China’s electric and hybrid vehicles will continue to dominate the automobile market with an expected growth of 40.0% and total sales of 2 million by 2020. However, with China’s economic growth slowing down since 2017, automobile sales and exports also face uncertainties in the midst of the trade war. Due to possible tariffs from the US, outlook in Japan’s automobile industry appears less promising. The 80.0% of automobile for US deficit with Japan means the country will be highly targeted for tariffs. The sales of new vehicles in the country saw a year-on-year decrease of 2.0% in 2018 as opposed to previous year. On the other hand, purchasing power on auto vehicles across ASEAN countries has been dramatically rising over the past year with vehicles sales expected to boost as economic conditions improve in most part of the region.