Asia: not so bleak after all

Regional export growth, though volatile, has been trending weaker after peaking in early 2018. Global trade forecasts suggest further moderation in 2019. 

"More recent consensus earnings forecasts have been pared down and are directionally in sync with the anticipated course of the business cycle.”

The technology cycle is also past its prime as global semiconductor sales, the best barometer of the cycle, are forecast to grow by less than 5 per cent after two consecutive years of double-digit growth.

Slower growth in 2019 is, however, a consensus view. To ANZ Research, the more relevant developments will be the relative growth differential with the US and the consistency between consensus earnings forecasts and the evolution of the business cycle.

This slowdown will have a bearing on the region’s export performance. Electronics exports have been the mainstay of overall export performance of several regional economies.

Slower growth in China and tighter global liquidity are additional headwinds but as they have already played out to considerable extent, their impact on regional growth should be incremental.

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Does it matter?

Narrowing growth differentials between the US and Asia were a major source of volatility for financial markets in 2018. Although emanating from slower growth in the US, this differential is set to widen in 2019.

While accelerating growth in Asia would have been the ideal backdrop for financial markets, the widening still suggests a better geographical balance in portfolio flows.

Encouragingly, more recent consensus earnings forecasts have also been pared down and are directionally in sync with the anticipated course of the business cycle.

This consistency is important to the extent it limits the scope for downside surprises in earnings and, by implication, portfolio flows. Earnings growth forecasts for the US continue to remain superior to those of Asia but are directionally also converging. 

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For most Asian economies, ANZ Research notes earnings are now forecast to either contract or rise by low single digits. Overall, both developments are favourable as they reduce the scope for downside surprises.

The bottom line

At the end of the day, slower growth has been priced in and the scope for further shocks to financial markets has receded.

Moreover, the worst phase of current account deterioration has now passed and central banks in most Asian economies can finally become more relaxed on monetary policy. Therefore ANZ Research expects a better environment for capital flows into the region.

Sanjay Mathur is Chief Ecnonmist, Southeast Asia & India at ANZ