I went to Asia a couple of weeks ago to try to get away from the Eurozone and maintain some semblance of sanity, and to try to figure out what’s going on in the continent that has driven global economic growth in recent years.
Escaping the Eurozone crisis was of course impossible, since the fact is that Asian ‘decoupling’ is a myth and the Eurozone is the most obvious source of a global economic slowdown. Asia is, after all, an export driven cyclical economy as a whole.
Nevertheless, I did come away with slightly differing views from those held beforehand, while some views were reaffirmed. I’m marginally more comfortable with Chinese property over the short to medium term (note that ‘more comfortable’ is very different to saying ‘comfortable’), while there are a number of risks that I feel don’t get sufficient attention. Things like Asia’s reliance on trade finance provided by the rapidly deleveraging European banks have been getting more sell side attention and press coverage since I returned, although alarming signs of capital flight from a number of Asian countries, including China, still haven’t. There is still a prevailing belief that countries that are running current account surpluses and have large FX reserves are somehow immune from flights to quality, but this is untrue (indeed you only need to look at Russia in 2008 to see that significant capital flight can still occur to an extent that places the domestic banking sector under extreme stress). I’ve talked previously on our blog about what I believe to be a great risk to EM and Asia in particular in terms of ‘hot money’ and ‘real money’ capital outflows (see here on how EM debt is the new ‘big short’), and evidence of recent capital outflows strengthens this view.
There’s a lot of emphasis on China in the short video I recorded below, but this is only natural when you consider that China has been behind about a third of global growth in the last few years, and its economy is at least as big as the rest of Asia put together (indeed, in the last year, China’s economy has grown by the size of roughly another Indonesia). And apologies for the sound quality in parts, I’m not sure what possessed me to film myself with jumbo jets landing over my shoulder. Our digital team here have insisted on putting me on a training course.