Asian markets' economy to grow slowly in 2012

Asian markets’ economies should continue to grow in 2012, but at a slower pace than 2011 because of the potential drag the European sovereign debt situation has on global growth.

The reduction in global growth should help to cool inflation, and there are some potentially pleasant surprises for countries that are battling high prices as global food prices tumble.

Analysts from Nomura estimate Asian economies as a whole will grow 5.8% in 2012, with China forecast to grow at 7.9%, down from 9.2% in 2011 and India at 7.2%, down only 0.1percentage point from 2011.

Asia might be able to weather lackluster growth in the Group of Three countries – that being the U.S., the EU and Japan - Nomura analysts said, as Asian economies are steadily reducing its reliance on the G3 and are tying themselves closer to Chinese demand. However, if the European debt situation leads to a deep recession similar to 2009 – which Nomura analysts said is “a clear and present risk” then Asia’s economies would be hit hard again.

Barclays Capital analysts see GDP growth in China slowing to 8.1% in 2012, with neither a hard landing nor a sharp rebound likely. Inflation could fall back to 3.2% from 5.5% in 2011.

The main drag on China’s GDP growth will be a pullback in property investment, and a resultant impact on heavy industry, Nomura said. They added that policy responses will be slower and smaller than in 2009 as China slows. “China will be in the midst of a political transition to the next generation of leaders, and we think a lesson has been learnt that aggressive 2009-style easing can further worsen the quality of GDP growth,” they said.

Steel consultancy MEPS noted there has been a slowdown in infrastructure investment because government expenditures are focusing more on housing than infrastructure, particularly affordable first homes.

“Substantial investment from private sector real estate developers had been central to this strategy. However, private sector involvement on this scale failed to materialize and central and local authorities have increasingly had to plug the gap,” MEPS said.

The problem is there is more money to be made in higher-end property developments and the government is attempting to reduce speculation-driven demand for these houses.

“However, these policies are not having the desired impact and government investment in economic homes continues to substantially outpace that by a private sector transfixed by the profit to be made elsewhere,” MEPS said.

Barclays said one of the key risks for China is a “disorderly correction” in the housing market.

Even though Asian economies may be slowing down, they are still growing faster than Western economies. One way to play the growth is to consider mid-cap and small-cap companies, said Adam Patti, chief executive officer of IndexIQ, a provider of Asian-focused exchange-traded funds, among other funds. These smaller firms are more influenced by domestic consumption, rather than the large-cap firms that might be more export-driven and thus feel more of an impact if there is recession in Europe.
 
He also said as investors look to Asia for international exposure, they seem to by default look to China. But there’s more to Asian growth than its largest country. “Everyone is so focused on China. But what is China dependent on? Natural resources - and they get that from Australia. They get industrial and information technology, and infrastructure from South Korea and Taiwan. I advise people to buy the picks and shovel-makers, not the mine,” Patti said.

In India, domestic demand could be tame until the second quarter of 2012, due largely to the lagging effect of monetary tightening and a delay in key policy reforms, Nomura analysts said. If key policy reforms are put in place and the Reserve Bank of India eases monetary policy, then Indian growth could pick up in the second half of 2012 on a rebound in domestic investment.

“Key factors behind our expectation of plus-7% growth in 2012 are the strength in private consumption due to a growing middle-income population and an increase in rural income, which has been supported by government programs,” analysts said.
 
Barclays estimates 2012 GDP for India to be on par with 2011’s level, at 7.1%. Domestic demand should be resilient, which should support continued growth in the country. They also expect central bank easing in India by the second quarter of 2012.

INFLATION MAY FALL IN ASIA

An important factor to keep in mind for emerging markets for 2012 is the price of food. Unlike in Western economies where the cost of food is a limited portion of the total household income, food prices are a significant component in emerging markets.

The food price index published by UN FAO has fallen for five consecutive months now, and is some 9.5% lower than the 2011 peak in February. Analysts at Citi suggested that a period of annual food deflation could start this month and continue in early 2012.

With global food prices falling significantly in the past few months, there are some potential surprises for 2012. Citi said Asia could see the biggest positive surprise because they have the highest correlation with global food prices. This is particularly true in China and India, while not so much with South Korea and Taiwan.

Citi said that inflation in Asia should be lower in June 2012 than it is currently for China, Hong Kong, India, Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan, with only Indonesia likely to see higher inflation.

JAPAN: CAN IT STILL GROW?

Japan’s economy was challenged on many fronts in 2011, including the March earthquake/tsunami, the October flooding in Thailand that affected the auto industry, the European debt crisis, and yen appreciation. The country shook off the impact of the earthquake quickly and has almost overcome the impact of the Thai flooding, analysts at Nomura said. Headwinds for the first half of 2012 are the slowing global growth and the strength of the yen. Those factors won’t be enough to stall Japanese growth because the country is benefitting from a variety of earthquake-related factors, including increased automobile production and reconstruction demand. “We think these will enable Japan to muddle through,” Nomura analysts said. They forecast 2012 GDP at 2.3%, versus a negative 0.3% in 2011.

In the first preliminary estimates of third quarter GDP, Japan’s economy saw real growth of 1.5% quarter over quarter, or 6.0% annualized. This was the first growth since the third quarter of 2010.

Japan should be able to avoid a recession in 2012, Barclays said. They put 2012 GDP at 1.7%.

Patti said he’s bullish on Japan, but said that many investors focus on the big names like Toyota and Honda, which will be more exposed to the problems in Europe and the U.S.’s sluggish growth. Again, he emphasizes seeking out firms that are involved with domestic production.
 
“You want to access the activity that is building Japan. They had huge growth, higher than expected. The country has come roaring back since the earthquake,” he said.

Nomura said while the third quarter GDP growth was strong, that advance should retreat in the fourth quarter because of the slowing of global growth, yen strength, weak Japanese equity prices and the impact of flooding in Thailand, particularly on the auto sector. That doesn’t mean the economy will stall, they said, because consumer spending is stable because of the “solid” climate for jobs and incomes. Also, reconstruction projects related to the earthquake will continue.

Japan still is dealing with its enormous debt load which will be a problem longer-term. In the short-term, though, Patti said there could be some bullish plays in Japan. “Focus on the rebuilding of Japan, over the next 12-24 months,” he said.