This article first appeared in Forum, The Edge Malaysia Weekly on July 3, 2023 - July 9, 2023

If the global economy is in a state of flux, with considerable uncertainty over the direction of growth and inflation, where should we put our money? If we think systemically and act locally, allocating assets where we are more familiar, then Asean remains a reasonably bright spot. The ­Asean+3 Macroeconomic Research Office forecasts growth of 4.9% for Asean this year. This assumes that external demand will recover in 2024, so regional growth will expand by 5.2%, roughly the potential growth trajectory given the demographic trajectory, as Asean is a young region with huge natural resources in a strategically key region that controls the major shipping lanes for trade between East Asia and the West.

The East and South Asia region — namely, the arc between industrialised Northeast Asia (Japan, China, South Korea and Taiwan), Asean and India, Bangladesh and Sri Lanka — account for almost half of the global population. With a population of nearly 700 million, Asean has half the population of China or India, but it is also half their geographical size. The International Monetary Fund (IMF) expects that in 2023, China, India and the rest of Asia-Pacific will account for 70% of world growth. Intra-regional trade is growing.

The effects of the Covid-19 pandemic have led to wild gyrations in growth and profits for the trade-dependent region. Exports in goods and services, which were slowing down since the US-China trade war began, were dealt a major blow in 2020, only to grow dramatically following a global injection of liquidity. After a dizzying 26% expansion in 2021, Asean+3 (China, Japan, South Korea) saw export growth moderate to 6% in 2022, following combined negative effects of supply shocks from the Russia-Ukraine war and unparalleled monetary tightening. This slowdown has carried over into 2023, with commodity prices in retreat as demand cools, which poses potential headwinds for Asean countries. Fortunately, the weakness in manufacturing exports was masked by the pickup in services exports, particularly as travel continues on its recovery trend.

Robust domestic spending has also helped overcome the slowdown in net exports. Private consumption provided a strong buffer to gross domestic product (GDP) growth last year while private sector capital expenditure showed a pickup in the second half of the year, mainly due to capital flows into Asean. Moreover, inbound travel to Asean countries continues to improve, with tourist arrivals recovering to between 50% and 70% of pre-pandemic levels. For example, Malaysia saw a 92% recovery in tourist traffic, coinciding with a high level of retail sales growth.

Much will depend on the inflation outlook. Most analysts think regional inflation peaked in 2022, with a gradual downward trend until 2024. In contrast to the US Federal Reserve hiking interest rates 10 consecutive times from March 2022 to May 2023, regional central banks have chosen a less hawkish route, allowing exchange rates to depreciate against the US dollar, rather than aggressively raising interest rates.

Countries like Malaysia have sought to offset inflationary pressure by expanding price controls and energy subsidies at the expense of the government. These measures have contributed to suppressing real wage growth. So, if inflation wanes as expected, then the economy may normalise without further intervention. The Bank of Japan is particularly cautious about interest rate hikes because it feels that current inflation is imported, so the yen is very cheap, inducing a recovery in tourism and speculation on the Japanese stock market.

However, inflationary pressures may not be transient, with the IMF cautioning that recent price increases have broadened to services. If inflation becomes entrenched structurally, the Fed may be forced to raise interest rates again with a severe impact on markets. This is something to be mindful of as we enter the second half of 2023. Fed chair Jerome Powell put markets on notice recently, when he indicated that more rate hikes could come by year end.

Most analysts who read the economic tea leaves often forget that the return on equity in investing in the stock market is not necessarily directly associated with GDP growth. China has had the fastest growing GDP relative to the US, but its stock market returns have trailed those of the US market. Indeed, even with recession fears in the US, the stock market is doing well with high expectation of profits from the artificial intelligence/ChatGPT revolution influencing stock prices of the major tech counters and semiconductor firms such as Nvidia. With abundant domestic liquidity, money is chasing profits.

Investing in India, Indonesia, the Philippines and Vietnam’s exchange-traded funds has paid off as they have outperformed in the last few years, because their stock markets have grown as domestic savers learnt to invest in their own markets. Since 1998, the market capitalisation of the Indonesian, Thai and Philippine stock exchanges has grown 26, 17 and 10 times respectively, compared with only four times for Bursa Malaysia. Foreign investors have concentrated not only on economic fundamentals, but also whether the country has good local corporate champions and political stability. Companies that can profitably exploit domestic growth and increase market share gain investor interest, such as new retail platforms. It’s the story you tell about future profits that gets attention.

Picking growth stories is important, but investors should be aware that country stories are not necessarily the same as picking the right companies.

Tan Sri Andrew Sheng writes on global issues that affect investors. Tan Yi Kai is a Malaysian multi-asset trader based in Hong Kong.

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