Update on Emerging Markets: Asia Leads Global Recovery

Stephen DeAngelis

May 04, 2010

Earlier this year I posted a blog entitled Emerging Market Nations Continue to Fare Better than Others. The primary focus of that post was the so-called BRIC countries (Brazil, Russia, India, and China). Recent articles have tended to focus more on Asia as the rising global demand center that will help lift the rest of the globe out of recession [“Economic Recovery Picks Up Steam Across Asia,” by Alex Frangos, Wall Street Journal, 14 April 2010]. Frangos reports:

“Singapore, a bellwether of the world’s fastest-growing economic region, tightened monetary policy after reporting its swiftest expansion on record, in the latest sign that Asia is recovering far more rapidly than the West. More evidence came from South Korea, where a spurt of hiring in the manufacturing sector helped push jobless numbers sharply lower and Moody’s Investors Service raised the country’s credit rating to its highest level since the 1997-1998 Asian financial crisis. The data show how growth in Asia—not just in China, but also among its neighbors—is continuing to surprise on the upside. China reported … its first-quarter gross domestic product grew 11.9% compared with the year-earlier period, faster than economists expected. In addition, the expansion is forcing authorities to confront the threat of inflation. Singapore’s tightening surprised many economists … and raised the likelihood that other central banks in the region will follow suit. Australia, Malaysia and India already have raised interest rates, but economies such as South Korea and Taiwan have kept policy at crisis levels for fear of derailing the recovery. Some central banks in the region have been reluctant to tighten for fear of making their exports less competitive compared with China, which has kept its currency in a de facto peg with the U.S. dollar even as its economy is forecast to grow 9.5% this year, according to the World Bank. Higher interest rates tend to strengthen currencies and make goods more expensive on the world market. However, robust overall growth, and expectations that China will let the yuan rise against the U.S. dollar in coming months, may be making it easier for policy makers to tighten policy without fear that stronger currencies will hurt still-recovering export sectors.”

Frangos focuses on activity in Singapore believing that indicators from that small nation are good predictors for what is happening or going to happen elsewhere in the region. He continues:

“Singapore’s trade-dominated economy grew 32% in the first quarter on a seasonally adjusted annual basis, boosted by a 139% jump in manufacturing, much of it electronic goods destined for the U.S. and China. While GDP data from this city-state’s relatively small economy are volatile, both figures were the fastest rates of growth since the data series began in 1975. ‘This is not only a Singapore story,’ said Endre Pedersen, Executive Director of Fixed Income at MFC Global Investment Management. ‘It’s an affirmation of Asia’s strength compared with the rest of the world.’ Singapore raised its 2010 growth forecast to between 7% and 9% from a range of 4.5% to 6.5%. The Singapore Monetary Authority—the city-state’s central bank—said in a policy statement that Singapore’s economy has ‘now fully recovered the output lost during the recession, and the economic activity in a broad range of industries has exceeded its pre-crisis peak.’ Asia is being helped by consumers in the region, who are free to spend thanks to low unemployment and rising wages. More importantly, these export-oriented economies are thriving on demand from abroad, thanks to a rebound in Asia’s traditional customer base in North America and increasing demand from within Asia, especially China.”

Frangos takes a quick look around the region and notes that “the Philippines reported … its exports rose 42.3% in March from the year earlier” and that “even long-struggling Japan has shown signs of life with brisk trade and retail sales.” In South Korea, the seasonally-adjusted unemployment rate fell to “3.8% in March from 4.4%.” As a result, Frangos reports, “Moody’s Investors Service upgraded South Korea’s credit rating” because of the country’s “exceptional level of economic resilience to the global crisis, while containing the government’s budget deficit.” Another Asian nation that is expected to do well is Indonesia [“Brands Bet on Indonesia as Spending Booms,” by Patrick Barta, Wall Street Journal, 7 April 2010]. Barta reports:

“International companies are betting Indonesia will become Asia’s next big consumer market after China and India—in part because of booming jungle outposts like … Samarinda, a coal-mining center on the far eastern edge of Borneo, [where] the population has more than tripled since 2000, and incomes are rising rapidly. Ford Motor Co. has added its first dealership and Honda motorcycle salesmen say they can’t get motorbikes fast enough to keep up with demand. Variations of that pattern are being repeated across this vast archipelago nation. With sales of cars and motorbikes set to rise 15% or more this year, Ford dealers are adding a new showroom nearly every six weeks. In January, European private equity group CVC Partners agreed to pay more than $770 million for a controlling stake in one of country’s largest retailers, PT Matahari Department Store, which plans to add 150 new outlets, including one just opened in Samarinda. H.J. Heinz Co. said in February that Indonesia played a major role in pushing Asia sales, including chili sauces, up 41% last year. It also recently predicted a 23.1% increase in packaged food spending in Indonesia between 2009 and 2011—a faster rate of growth than India and China, which were expected to grow 20.0% and 14.3%, respectively.”

As the world’s fourth most populous nation, “Indonesia has long promised to be one of the world’s biggest consumer markets.” In the past, it hasn’t lived up to its promise “because of political instability and disappointing growth after the Asian financial crisis of 1997-98.” According to Barta, however, that is about to change “as Indonesia stabilizes, with a democratically elected government and surging sales of commodities such as coal, natural gas and palm oil to China.” He continues:

“Last year, Indonesia posted the second-highest personal spending growth in Asia, behind China but ahead of India. Private consumption climbed 5.1% compared with 0.4% growth in Asia excluding China. … Unilever’s Indonesian arm, which sells soaps, ice cream and other consumer goods, said in March that 2009 sales shot up 17%—well above previous years and among the fastest rates in the world for Unilever. … Indonesia’s resurgence as a consumer market is the latest evidence that developing Asia, which for years relied primarily on exports for growth, is becoming more self-reliant as it develops a bigger middle class and its own domestic demand.”

Barta notes that Indonesia’s economic future still faces some challenges. For example, it “still rates poorly in international indexes measuring corruption and ease of doing business.” As the world’s most populous Muslim nation, Indonesian must also balance secular and religious concerns. Barta also notes that “the country also isn’t industrializing as rapidly as China and other emerging markets, which could limit its growth in future years.” Despite those challenges, Indonesia is on the rebound. Barta continues:

“Powering the rebound, analysts say, is surprising strength in once-ignored second-tier cities like Samarinda, which in some cases are posting growth rates approaching 10% a year, on par with China, analysts say. The better-known capital of Jakarta, a city of more than 8 million people, used to dominate Indonesia’s political and economic landscape. But farther-flung areas, including the islands of Sumatra, Sulawesi and Indonesian Borneo, also known as Kalimantan, have a far greater share of the natural resources desired by China. These areas are also benefiting from political reforms after the fall of former dictator Suharto in the late 1990s aimed at decentralizing the country.”

Richard Cohen believes another country that will flourish in the years ahead is Vietnam [“The Miracles of Realism,” New York Times, 20 May 2009]. He believes they will succeed in spite (not because) of communism. He writes:

“Vietnam has … peace, stability and independence. It also has Communism, but of a form that allows a Vietnamese leader to ring the opening bell on Wall Street. The ‘white skins’ still around have forsaken war for foreign investment. … Vietnam’s success has been anchored in realism and engagement. This has allowed U.S.-Vietnamese relations to flourish less than 35 years after the end of a war that left more than 58,000 American troops and some 3 million Vietnamese dead. Defying the great recession, the economy here will grow at least 4 percent [in 2009]. … Since a bilateral trade accord was signed in 2001, the United States has become Vietnam’s largest export market. The likes of Intel and Victoria’s Secret do big business in a country that’s Communist and proud of it.”

Although the news from Asia is mostly positive, there remain a few trouble spots such as North Korea, Myanmar, and Thailand. Of those three, Thailand still has the best chance of emerging from its current political crisis with the ability to make a rapid economic recovery. In fact, it was reported this morning that stocks in Thailand surged on hopes of end to the political turmoil there. The resurgence of Asian economies has resulted in a spurt of deals by emerging market companies [“Emerging markets’ deals boost,” by Sundeep Tucker, Financial Times, 15 March 2010]. Tucker reports:

“The extent to which emerging economies have broken clear of recession far quicker than their developed economy counterparts is highlighted by a study of cross-border deal activity. The KPMG-backed survey, published today, shows that companies in emerging economies stepped up acquisition activity considerably into developed markets over the last six months of 2009. By comparison, the number of deals involving companies from developed markets buying assets in emerging economies fell. The figures underscore the renewed confidence of companies in emerging economies to embark on outbound deals, and how the ongoing impact of recession and lack of credit have curtailed the globe-trotting ambitions of many western companies. … The figures are contained in a six-monthly study of inbound and outbound activity involving 11 emerging markets and 12 developed economies, excluding private equity deals. The emerging economies include India, China, Russia and South Africa, while the developed economies feature the US, UK, Germany and France. The study does not aggregate values because about half of all deals omit financial terms.”

The good news for the global economy is that a global middle class is again increasing and starting to spend. As a result trade deficits have begun to shrink and demand for goods has also increased. The effects of this trend should be widespread and positive. Although some analysts fear that equity stocks in emerging markets may be headed toward a bubble, the world is paying much closer attention now to such matters. Overall, trends in emerging market countries are positive and should be good news for everyone.