Forstrong Global CIO and president explains why COVID-19 has super-charged the region's growth prospects despite reluctance of western investors
WP presents a weekly series with Forstrong Global president and CIO Tyler Mordy highlighting and analysing seven macro super trends. In part three, Mordy addresses the rise of emerging Asia and the reasons behind it. Don’t miss part 4 next Thursday when we’ll focus on the global inflationary outlook. If you missed part 1 on the dawn of the fiscal stimulus era or part 2 on globalization in a post-virus world, click on the links.
Did western investors miss the memo? Or are they finding it too difficult to read, like when financial planners tell you to go through your credit card statements?
Either way, Forstrong Global believes many are failing to acknowledge that after a decade of hypereasy monetary policy and slow growth, global capital has become grossly misallocated into development markets. In short, emerging Asian assets are on sale while its bonds offer positive real yield.
CEO and president Tyler Mordy told WP that investors are also experiencing an existential struggle with the rise of the region, which he classifies as China, India, Taiwan, Korea, Indonesia, Malaysia, Philippines, Thailand and Vietnam.
While already bullish on this area’s prospects, he believes the coronavirus pandemic has simply turbo-charged this super trend. Asia, he added, has been a clear winner in dealing with the COVID-19 outbreak, with regards to both health and safety, and monetary and fiscal response.
On the former, the region appears more experienced – maybe a legacy from SARS – and their respective healthcare systems more equipped to handle a sudden influx of patients. From a monetary policy standpoint, Mordy said the West’s often panicked approach is illustrated by how its policy responses have dwarfed Asia’s.
He said: “The stimulus size as a percentage of GDP that the U.S., Germany and Japan has unleashed is close to 10% -- far greater than the 2008 global financial crisis -- whereas China's is 3% and the country hasn’t materially relaxed interest rates and certainly has not ventured into unconventional monetary policy. In the West, unlimited QE and massive reductions in interest rates have been swiftly introduced.
“The overhang of the post-pandemic world is going to be far more punishing to the West than it is to Asia because the West has used most of their dry powder; deficits will blow out and you can’t lower interest rates further without going negative.”
The key takeaway is that economic policy responses have been far more conventional in Asia. He added: “That trend was well under way after the global financial crisis but this has put it into hyperdrive.”
The pre-virus period was already defined by global gloom and deep negativity but Asia’s growth outlook is bright. Markets should be cheering this on, Mordy said, but they aren’t.
The misallocation of global capital means that, in general, the marginal dollar invested in the West is priced for disappointing returns. By contrast, even after a respectable equity rally in 2019 and relative stability in 2020, valuations of both onshore and offshore Chinese stocks remain near the lower range of historical norms. Bank stocks are also deep value plays. Forstrong believes emerging market bonds offer positive real yields, stable currencies and the potential for price appreciation.
Mordy said: “Our investment team calculates that a broad basket of EM bonds can easily return more than 50% over the next five years. Imagine any Western bond offering those return prospects. Looking out further, the ascent of Asia as an independent economic centre of gravity is a boon for investors.
“With diverging economic trajectories and monetary policies - especially from the United States which, in the post-war period, has functioned as the de facto leader of world order and economic stability - macro trends in Asia are highly diversifying for investor portfolios. Asian, and especially Chinese, assets reflect this by showing low correlation to rest-of-world stocks and bonds. Investors seem to have missed the memo on all this.”
Instead of recognising the emerging Asia story, Mordy added that “end-of-cycle” fears had plagued the landscape up until 2020, further force-feeding capital into negative-yielding bonds and the perceived safety of US stocks. This is a dangerously American-centric perspective of the world. While the US has been recovering since 2009, this does not hold true for many other countries, which took longer to click into gear after The Great Recession.
Now hit with another global crisis, there is an increasing reluctance on both sides of America’s political divide that Asia is where global growth is going to come from.
To illustrate this reticence among western investors, Mordy drew on Milan Kundera’s post-modern masterpiece from 1984, The Unbearable Lightness of Being, which “perfectly captures” the human paradox of lightness and weight. At times we sense the transient nature of life, recognizing ourselves as one of many participants in a vast unfolding universe. The world then feels weightless. Other times, a heavier hand reminds us of a greater significance. We, therefore, see our unique role in the grand cosmos and recognize the difficulties that may lie ahead. Suddenly, our existence is heavy.
Mordy explained: “Today many investors are experiencing their own existential struggle with emerging Asia’s economic rise. On the one hand, the region has created enormous growth around the world. China alone has delivered roughly half of all global GDP growth over the last decade. This has been a crucial prop to a growth-deficient world. And yet there is a heaviness to it all. From a Western perspective, it can be difficult to acknowledge another’s relentless rise. The growth is not our own. But new economic realities have surfaced.
“Investors need to face these facts head on or risk being left behind. In many ways, the world has turned upside down. Traditionally, Asia and the wider emerging markets complex was the domain of uncertain democracy, endless elections and other political risks. Yet the reality is that deeper political fault lines now lie in the West.”
He added: “Everywhere you look in the developed world, political risks are elevated. While the West moves firmly in the wrong direction, Asia is moving in the right direction. Yet many investors still view the region as vulnerable to crashing growth and contagion risks.”
The mistake is to view Asia through the same lens as the late 90s. Forstrong believes that the region is now much more shock-resistant. Where before it was hit with unsustainable debts amassed in US dollars, falling local currencies and fading liquidity, now a whole host of macroeconomic factors have vastly improved the region’s stability. For example, in the mid-1990s inflation rates in the region above 20% were not uncommon. Today’s inflation is trending below 3%.
Mordy stressed to WP that several drivers underpin this development. Reduced reliance on foreign capital has lowered local currency volatility and, as a net oil importing region, Asia has received a trade boost from lower oil prices. They have also taken steps to reduce their exposure to oil, with China and India accounting for the lion’s share of the global increase in renewable energy generation.
The wider list of improving factors is lengthy: the emergence of domestic pension systems, which further reduces reliance on foreign funding; improved trade balances; and better fiscal positions.
“Still, macro misinformation persists,” Mordy said. “China is the consistent whipping boy here. Sensationalist predictions of a crash have become almost cliché. Yet the reality has been much different. No Minsky moment has arrived.”
While Mordy concedes the country is at a crucial inflection point, the trade war’s tariffs and the coronavirus crisis has reduced external demand and sent broader shock waves across global supply chains. Domestically, the country must deleverage but maintain reasonable levels of output. Growth is also slowing, but contrary to a long running consensus, none of these are existential risks.
He explained: “In fact, the most important facts about China today are not problems of slowing growth and high leverage. Rather they are the shift away from exports and massive infrastructure spending to consumer-led growth, improving margins and financial liberalization.
“What’s more, the Chinese economy is 30 times larger than 30 years ago measured in US dollars. Even at a slower GDP rate, China’s contribution to global growth, approximately 21% last year, is far higher than at any time in history and higher than any other economy in the world.”
Before COVID-19 sent shockwaves around the world, growth in developed economies was forecast to stagnate in the coming years while Asian growth was expected to accelerate. The relative success of Asia to deal with the pandemic does not suggest this outlook will change.
By 2024, GDP growth will be only 1.2% per annum in developed countries but a stellar 5.3% in developing Asia. Overall, emerging market countries already account for 68% of world growth. This share will rise to 77% by 2023. For comparison, US growth is just 7% of the world and shrinks to 4% by 2023, according to the IMF.
Another crucial element, Mordy said, is that emerging Asia still runs traditional monetary policy while the list of countries doing so has dramatically shrunk since 2008. Developed countries have painted themselves into a policy corner. Their economies are already mature, naturally limiting their ability to grow, but now negative rates limit the effectiveness of the monetary lever.
Last year, G-20 central banks cut rates a total of 47 times but only six were from developed countries — the rest were from developing nations. In addition, western economic policies are increasingly becoming more populistic, further limiting productivity gains.
Mordy said: “By contrast, developing Asia is a region with far more policy options than growth headwinds. This remains their ace in the hole. With ample room for further monetary easing, other forms of fiscal stimulus - due to generally lower government debt levels - and ongoing structural reform, Asian policymakers are far less concerned about a sudden growth downturn than the common narrative would lead.”
This week, Wuhan, China, the alleged origin of COVID-19, slowly whirred back into life while the western world largely remained in a quarantined state. Given the tailwinds they were enjoying pre-pandemic, the region appears ready to continue its growth pace and leave the West farther back in its rear-view mirror.
Mordy believes investors’ heaviness when looking to Asia will ease as this super trend accelerates.
“Low expectations and low Asian asset valuations mean higher future returns,” he said. “It doesn’t feel that way to most right now. But the time is near when those invested in Asian assets will feel light again.”