ADB says Asia to lead recovery amid challenges

MANILA, Philippines - As the year of the dragon ushers in a lot of challenges, Asian economies are expected to lead a strong recovery in the latter part of the year, the Asian Development Bank (ADB) said.

ADB president Haruhiko Kuroda said this indicates change “with a measure of calm, sensibility, and prudence,” and that Asia will play a considerable role in ensuring global stability in the face of possible recession.

“Asia can help the process of global economic recovery. Certainly, high-saving Asian economies can participate in external financial-bailout packages. But the best thing that Asia can do is to sustain its own robust economic growth,” he said.

By generating new growth opportunities, Asia can play an increasingly critical role in stimulating the global economy. Developing Asia must escalate its efforts at rebalancing growth by reducing reliance on exports and increasing domestic spending, which would help to prop up import demand. The major challenge is to keep domestic demand growing, despite the region’s strong links to the global economy, the ADB head said.

“Doing so would benefit national economies, bolster regional development, and support global growth,” he added.

If Asia can overcome its short-term difficulties, and global financial markets stabilize, the region faces bright prospects in terms of leading the global economy. Annual gross domestic product (GDP) growth this year will likely sustain last year’s momentum and remain above seven percent, he said.

A recent ADB study estimates that Asia could account for about 52 percent of the global economy by 2050. But a major challenge that may alter its prophetic role in global economy is the ability to ensure domestic stability and equalities. Domestic inequities now pose major risks to social stability and could hamper long-term growth prospects.

“Asian governments should seek to ensure that growth is inclusive, with benefits that are widely shared, including by women and the poor, and that these benefits reach isolated areas. Asia’s rapidly aging populations also require social protection, and strengthening access to healthcare and education could help the rebalancing process and contribute to global recovery.” Kuroda said.

“The dragon represents a transition of power, a change between old and new and is always seen as an inflection point,” said Philip Chow, CLSA analyst.  

The first half of the year could be characterized with a lot of volatility, uncertainties and mild shocks, as well as challenges and opportunities in the markets.

But that period is just for gaining strength and momentum before “the dragon will emerge from the water in a move that will herald positive events ahead.”

It is also an unpredictable beast that spits fire when it is angry. So, investors need to watch out they don’t get burned, he warned.

“If our readings are right, September should be one of the best months of the year, with plenty of activity in the markets,” the CLSA economist said, and added that the upward trend should continue through October and November. However, the head and the tail of the dragon can not be seen at the same time, the rally should run out of steam come December, moving sideways through the end of January 2013.

The brokerage and investment group said the year of the Dragon is more balanced in terms of the five energy elements, which suggests that the market will be less volatile in 2012 than it was last year.

“Fire is the only element that is not represented at all this year, but since fire subdues metal — think gold — this should be positive for the financial markets. That said, metal and earth are also lacking in the first half, which is why the positive breakout isn’t expected to come until the second half — indeed, as the dragon sinks back into the lagoon after chasing the rabbit back into its hole, the market may well continue to slide until July.

The presence of water and earth will make this a good year for stocks related to these two elements, including cement, gaming, property, tourism and transport.

Global banker Hongkong and Shanghai Banking Corp. (HSBC) said that the eurozone is in recession and its growth forecast is negative.

HSBC global head of macro and investment strategy team Philip Poole said that the problems of the eurozone will not be going away soon.

“I think the problem we have in the eurozone is probably a 10-year type of problem,” Poole said.

But the year of the dragon also offers lots of opportunities for Asia. Growth in Asia will slow down, but is still expected to be growing much more quickly than the developed world.

“The problem in the emerging world in 2011 was inflation but as the economies slow, including China, the inflation concern is going away,” Poole said.

HSBC said there is significant value in corporate credit in both developing and developed markets, UK gilts and German bunds. Supported by strong balance sheets, investment-grade corporate spreads have widened to above 300 basis points from around 200 in March 2011.

Asian equities also offer significant value, as investors can still buy in the market at cheap levels when they are still very profitable. Profitability in the region is still seen to remain robust.

HSBC is also very positive on Asia’s fixed-income market due to the economic backdrop, including low inflation, low interest rates and low chances of overheating.

“The backdrop is not rosy in many respects, but it is probably not as bad as many people suggest,” Poole said. “We certainly do not see a global recession.”