For all the chatter in the global press about the eurozone crisis, there has always been a sense that the region’s continuing problems only have a passing impact on Asian companies. A new report from Moody’s now puts some numerical heft behind that suspicion.
In its recent report, the agency analysed the finances of all the listed Asian companies that it currently rates, and found that 95% of them will remain resilient “in the face of a looming EU recession”. The two main areas in which EU weakness could affect Asian companies are in demand for exports and in financing from EU banks. In both these areas, Asian companies are relatively immune from pressure. Very few Asian companies analysed — fewer than 5% — earned more than 15% of their revenues from Europe and/or relied on EU banks for their funding.
Even those large companies such as Hutchison Whampoa that have significant operations in Europe are relatively unaffected by the economic circumstances. Indeed, the report noted that “they have not seen their credit profiles affected because their European-based operations have shown resilience”.
Moreover, the continuing deleveraging of European banks (or in other words pulling out of Asia and only doing business in their home markets) is not nearly as big a deal as many commentators are predicting. The report found that this process is underway but that “it does not present big funding risks for Asian corporate issuers”. Asian companies are well served by highly liquid local banks and capital markets that can easily handle the new business caused by European bank withdrawals.
The report, titled “Direct impact of looming EU recession is still moderate for most Asian corporates”, confirms what has long been apparent to many Asian companies: that what is happening in Europe is interesting on an intellectual, train-wreck kind of level, but has little effect on the day-to-day performance of their businesses.
Of far greater importance is what is happening in China, where a slowdown is now underway. Numbers released recently show that industrial production grew by just 8.9% in August, the slowest rate since May 2009. Moreover, imports into China fell 2.6% in August. What happens in China affects Asia far more than the crazed theatrics of eurozone politicians and financial markets.
With costs rising in tandem with slowing demand, Asian companies could do well to rethink their China strategy. Labour costs in China are now only about 20% below Eastern European levels, and are more expensive than in Africa. Moreover, the famed Chinese consumer is a fickle beast. Huge grey costs in getting goods to market add to the uncertainty. Speaking to one corporate executive this weekend, he said China is the only country in the world in which they do not make profit. He is certainly not alone in this, nor in his fear of having to articulate this to a board or a shareholder group who have their China blinkers on.
The relatively small amount of exposure to the eurozone is largely down to worries about the breakup of the euro: no investment can survive a 50% currency devaluation. However, there is appetite for increasing exposure to the region as a whole. Huawei has just announced a $2 billion investment into its UK operations. Infosys is spending $350 million on Swiss company Lodestone. Of course, the UK and Switzerland are outside of the eurozone and are attracting much of the inward investment into the region from Asian companies.
It is probably too early to say that Europe presents a better investment horizon than China, but it is true that the divide is not as stark as it once was. Great things free markets: they have a way of turning situations around.
