Improving growth is also evident in the recent improvement in manufacturing surveys, which have turned higher in contrast to those in Latin America and Eastern Europe. In addition, given Asia’s large trade sector, the region is likely to be the biggest beneficiary of the recent upturn in U.S. growth.
Less exposure to reversals in capital flows. With the exception of Indonesia and India, the major countries in Asia have generally sizeable current account surpluses. And even in the case of India and Indonesia, both countries have posted significant improvements in their current accounts.
As a result, the region has been, and is likely to continue to be, more resilient to higher U.S. yields—should they ever actually rise—and any potential interruption of capital inflows. In comparison, despite moderate current account adjustments, Latin America and EMEA are still running large deficits, and remain vulnerable to flight-of-capital if the Federal Reserve (Fed) raises rates sooner or more aggressively than expected,
To be sure, risks remain, most notably the extent and depth of China’s debt and real estate problem. While I believe the fear of a property slump in overdone, investors should pay careful attention to both Chinese property prices and loan growth.
That said, for now, I believe the risks are contained. The bottom line: While EM Asia is not without its risks or downsides, it offers something exceptionally rare in today’s market: the potential for an undervalued asset class.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.