A “perfect storm” is forming over Asian markets and economies, driven by “a combination of slowing growth and deleveraging within the Chinese economy”, said Andrew Swan, Blackrock’s managing director and head of Asian fundamental equities.
Swan, who was speaking at BlackRock’s mid-year investment outlook conference, framed his views in the context of Asian public equities, but much of the macro analysis was also relevant to the private sector.
China’s GDP growth rate will continue to soften, he said, adding that China has “the rising risk of a moral hazard in the banking sector that may require a shock to the system”.
Until you get a change in mindset in corporate China that realises growth rates aren’t what they were before, you’re going to have this problem of excess capacity which depresses profitability
Andrew Swan, managing director and head of Asian fundamental equities, BlackRock
Swan also mentioned the regional effects of the US Federal Reserve tapering its quantitative easing policy. “Quantitative easing has benefitted Asia over the past five years and as US dollar flows [into Asia] slow, it will impact [Asian] markets. We’re already seeing that today.”
In addition, QE tapering will push up interest rates, which will impact corporations in Asia. “We expect more earnings downgrades in the region.”
In the current climate, Blackrock sees regional growth in several sectors, including Internet plays and the tourism & leisure and healthcare industries. “Even in a market with substantial headwinds, these sectors are still good opportunities,” Swan said.
In China, he highlighted the emergence of industry consolidation over the next 12 months. China has too much capacity in many sectors, which is eroding company profitability.
He explained that companies have been planning capacity expansion for an 8 percent-plus GDP growth environment, a level that is unlikely to be reached.
“Companies added too much capacity because they thought growth was sustainable longterm and they need to adjust. Until you get a change in mindset in corporate China that realises growth rates aren’t what they were before, you’re going to have this problem of excess capacity which depresses profitability.”
However, BlackRock believes that the Chinese government is on the verge of forcing consolidation in old economy sectors. “That results in pricing power for companies that survive in these sectors.”
Another topic was the economic experimentation going on in Japan. Swan said the weakness in the Japanese yen is impacting in two ways. One, Japanese corporates are gaining marketshare over their Asian competitors.
“We’re starting to see the export share out of Japan pick up as a result of that competitiveness.”
A cheaper yen, however, is also rebuilding Japanese corporate profitability, which is driving an increase in offshore investment into Southeast Asia, ultimately benefiting economies there. Underneath Japan’s headline M&A deals, many smaller transactions have been occurring, he added.