Asian Markets Undaunted by 'Fiscal Cliff' Risks
Although many investors and government officials in Asia have one eye on the ongoing negotiations between the US President and Congress to avert the fiscal cliff, Asian stock and bond markets have shown few signs of nerves.
Many indexes are at highs for the year, boosted by fresh quantitative easing in the US and Japan, and hopes that the worst of the euro zone crisis may now have passed. Asian bond markets have taken off too, with corporate issuance nearly doubling.
"I think they will get this sorted in the next few months," says Michael Andrew, global chairman of KPMG based in Hong Kong." I don't know that we're all that concerned in Asia."
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Regional politics helps explain why the issue has not been that high on the agenda. Elections in Japan and South Korea, a power transfer in China, and major reform initiatives in India and the Philippines have been far more pressing concerns both nationally and across the region for most of the year.
Rob Subbaraman, chief Asia economist at Nomura, cites Europe, commodity prices and even economic overheating as bigger risks to the region in 2013 than the fiscal cliff, the damaging package of automatic tax rises and spending cuts that will come into force at the start of the year unless US politicians can agree a new deal.
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Economic indicators close to home have also been encouraging. Although China's slowdown has lasted seven straight quarters, recent data, including retail sales, industrial production and manufacturing activity, point to a pickup in growth in the final quarter. Most analysts believe this improvement will last into the first half of 2013, prompting the World Bank to raise its growth forecast for China to 8.4 per cent.
Although Japan recently fell back into recession, the new government, under Prime Minister Shinzo Abe, has vowed to do much more to battle entrenched deflation. Aggressive stimulative measures are expected, which could serve to boost domestic growth and push Japanese companies to invest more across the region.
Meanwhile many of the smaller economies of southeast Asia are enjoying consumption-driven booms, especially Indonesia and the Philippines.
There are plenty of reasons to hope that Asia's immune system is much improved. Intra-regional trade has flourished, while reliance on the US as an export destination has fallen from 25 per cent to 10 per cent in the past decade, according to Capital Economics.
Even those who expect the US to go over the cliff do not expect lasting damage to Asia. Mr Subbaraman says the US would need to fall into recession for the region to be "hit hard again" and that a temporary drop off the cliff would only "up the ante to reach a deal".
But, should an agreement not be forthcoming, Asia could yet feel the pain. Aside from the potential fall in exports, many countries in Asia have become increasingly reliant on US investment in their bond and equity markets.
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"Exports have become far less important than domestic demand in driving these economies," says Fred Neumann, head of Asian economics at HSBC. "The [danger of the] fiscal cliff risk for Asia is that we'll get such a confidence undermining event in the US that it knocks out global investment."
Nick Ferres at Eastspring Investments, the Asian asset management arm of Prudential, warns that many in Asia are underestimating the danger. Should the US tip over the cliff, the impact would be "significant", knocking business and consumer confidence, and weighing on corporate investment plans. Asian earnings are still highly correlated to US activity, he notes.
The caution over exposure to developed economies can still be seen lingering in the equity markets – the region's standout performers this year are the Philippines, Thailand and India, all economies with a relatively low level of exports as a percentage of GDP.
The experience of this year also serves as a warning. When growth turned down in the eurozone, many hoped that the theory of "decoupling" would finally be proven correct. Instead, many Asian economies suffered steep declines in exports and from a cutback in European bank lending, both of which dragged on overall growth.