If you still believe the old saying that "when the United States sneezes, Asia catches a cold," it can only be assumed that you have not been listening to what Andrew Freris has been saying for the past year. Freris, chief economist for the ex-Japan Asia region at BNP Paribas, has been consistent in voicing his belief that the performance of Asian economies is most dependent on what is happening within Asia, not by events in the US or elsewhere.
The highly animated Freris was keen to repeat this view again yesterday (Monday) at a press briefing in Hong Kong. "The markets are still obsessed with the US economy as if this is what drives Asia," he says. "That is not the case because the most important driver is the Asian economies themselves. Domestic consumption and investment have the biggest effect, followed by exports to other Asian countries. Exports to the US are the third factor, with the fourth being exports to Europe and Japan.
"China has been experiencing GDP growth of close to 8% mainly because of domestic consumption and investment," he observes. "Export growth in the PRC is nice, but is only the chocolate sauce on top of the ice-cream."
Warming to his theme, Freris adds that the process of decoupling Asia from the US has been going on for several years, proved by the fact that countries within Asia are at differing stages of the business cycle and are also not likely to react to changes in US interest rate policies.
"If the Federal Reserve was to lower interest rates, sure that could have a positive impact on the equity markets, which in turn might benefit Asian stocks," adds Freris. "But a fall in rates is not likely to cause Asian countries to change their rates because those are driven by internal issues. Secondly, would a fall in US rates really have an affect on what is hindering the Hong Kong economy: no rebound in the property sector, the fiscal deficit, deflation and exchange rate pressures? I say that it would not be bad news, but it is irrelevant to the issues that really matter."
Meanwhile, Freris' colleague, Albert Hofman, BNP's head of Asian fixed income research, points out that while the US and Europe are seeing record numbers of defaults in their respective bond markets, Asia has not seen any at all. This, he believes, makes investment in Asian fixed income assets all the more attractive as it offers opportunities for portfolio and risk diversification, as well as yield pick-up.
"2002 has seen the third highest rates of US defaults in eighty years, and the story is much the same in Europe," notes Hofman. "In Asia, we are witnessing a reverse of this trend and there has been a material decrease in the number of downgrades. Top level Asian credits are benefiting from the flight to quality that has taken place in the last year, and with the risk premiums on Asian bonds tracking what is happening globally, this presents arbitrage opportunities in terms of asset allocation to Asian credits."
