Reviewing Strategic Themes for Asia Pacific
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Reviewing Strategic Themes for Asia Pacific

Slower growth could expose additional problems in the Asian economies. With the fall in APAC forward P/E multiple already comparable to that in prior downturns, investor focus is now turning to EPS cuts. 

Can we assume the worst case as forward earnings in sectors with above-normal profit growth fall to December 2019? Does this imply a cut to APAC EPS? Opening up local services may not fully offset the impact of the expected slowdown in global goods output. The export surge from 2019 to 2021 was 2-15% of GDP for Asian economies. This imbalance between goods and services may also raise debt-sustainability questions, assuming a rise in sovereign debt ratios.

The rise in bond yields is also less than in the US. This discrepancy may suggest a lack of stress in local currency bond markets. Low foreign ownership has helped. These risks may remain an overhang on markets until the now well-anticipated growth weakness is manifest and second-order risks fade, such as debt sustainability issues in markets such as Italy.

Despite the uncertainty, large portfolio outflows, and dependence on imported energy, Asian EM currencies have depreciated less than those of several developed market currencies. The rise in bond yields is also less than in the US, implying a lack of stress in local currency bond markets. Low foreign ownership has helped. However, as governments globally subsidize energy consumption to cushion their economies, the risk of prices staying higher for longer rises, eventually stress-testing fiscal sustainability and FX reserves for weaker hands. Some frontier markets are stressed, but given their small size, contagion risk is low.

Contrary to recent prior episodes of weakness, there may be limited local policy space available to stimulate growth (ex-China). The recent fall in US bond yields reflects market growth concerns. Additionally, the downward lash of the supply-chain bullwhip is already visible in metal prices and upstream technology components. 

@Neelkanth Mishra