How to play markets amid Asia’s Spring Festival

Chinese folk artists perform during the opening ceremony of the Spring Festival Temple Fair on Thursday in Beijing.
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Chinese folk artists perform during the opening ceremony of the Spring Festival Temple Fair on Thursday in Beijing.

If you like color – a lot of it – tradition, vitality and optimism you could have seen all that on display in East Asia and in many Asian communities in the West since February 18, which marked the beginning of the Spring Festival celebrations.

There were even lion dancers on the floor of the Philippine Stock Exchange in Manila collecting red packets – hong bao – with "lucky" cash, a colorful way of sharing some of the bounty generated by a 27 percent annual return on local equities. The loud dancers apparently earned their gifts because they chased away whatever remained of bad spirits: the shares index added another 0.3 percent by the end of last week and came within 26 points of its record-high level over the last twelve months.

Japan should also join the party. The Japanese analysts worrying that East Asia's biggest celebrations will hurt their exports should relax. They should follow their government's long-standing recommendation to have fun and take more time off. That would prop up Japan's personal consumption, which slumped 1.2 percent in the course of last year. And it would also sharpen the impact of Japan's proverbial "reform arrows," because the household spending (61 percent of gross domestic product -- GDP) easily dwarfs export sales (16 percent of GDP).

World's biggest party

Indeed, it is possible that this party time may weaken the manufacturing activity and related trade flows, but it will boost a much larger service sector in areas such as transport, hospitality and entertainment industries.

Take the case of China. It is estimated, for example, that this Spring Festival, the world's biggest annual human migration, will generate some three billion trips by automobiles, trains and planes over a 40-day festive period. This huge volume of travel business and closely related retail trades will go a long way toward offsetting declining incomes from temporary slowdowns in factory output.

These developments are part of ongoing structural changes of the Chinese economy. Private consumption last year accounted for 51.2 percent of GDP, an increase of 3 percentage points from 2013. The service sector also continues to expand; it is now estimated that services represent 48.2 percent of China's output, more than double the size of two decades ago.

That message has not been lost on foreign investors. China's inbound foreign direct investments in the service sector last January rose 45.1 percent from the year earlier to $9.2 billion, accounting for two-thirds of the total. With an impressive annual increase of 29.4 percent, China's foreign direct capital inflows last month were the strongest in nearly four years.

These numbers should calm down the people who think that the structural rebalancing of the Chinese economy – toward consumption from exports, and toward services from manufacturing – will inevitably lead to collapsing growth and a prolonged slump.

Nothing could be further from the truth. Services are labor intensive. They support employment creation and China's large-scale urbanization process. All that means that a rapidly growing urban middle class -- estimated between 350 and 400 million people, with disposable incomes rising last year at a rate of more than 9 percent -- will serve as a strong pillar to growth.

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And neither should investors take seriously market rumors that China intends to push the yuan down in order to support growth through stronger exports.

Chinese exports are doing fine. They rose 10 percent in December from the year earlier, marking a 6.1 percent annual gain for 2014. If the Chinese economy needs any support in the months ahead, the monetary authorities will further cut interest rates and reserve requirements to direct credit flows to banks (not the shadow banks) and particular market segments. But these policy measures will not be undertaken to target any specific level of the yuan's exchange rate.

No currency wars in Asia

The yuan has been roughly stable against the U.S. dollar over the last twelve months. I don't see any compelling reason to change that posture in the months ahead. In fact, Beijing's apparent desire to strengthen the role of the yuan as a global currency and a key vehicle of regional trade strongly suggests that exchange rate stability should be the preferred policy option.

Indonesia's interest rate cut last week is not – as some people seem to believe -- a competitive move in response to China's monetary easing. Some analysts were apparently led to believe that by media reports that the Bank of Indonesia worried about policies to weaken exchange rates in order to boost exports. The rate cut in Indonesia was made possible -- and desirable -- by the declining inflation in the wake of sharply falling energy prices, and by a large drop of imports reflecting a continuing weakness of domestic demand.

The possibility of Jakarta's further interest rate cuts will depend on substantial improvements in price stability. Indonesia's inflation rate of 6.96 percent last month would have to come down markedly, and to remain on a downward path, before any additional credit easing is contemplated. That is a tough call for a government which apparently wants to raise the present growth rate of 5 percent toward 6 percent in order to respond to pressing social concerns.

A number of smaller East Asian economies will have a much easier time implementing interest rate cuts. In fact, mild price deflations and deficits on internationally traded goods indicate that they should allow downward adjustments of their apparently overvalued currencies.

Investment thoughts

With the exception of a richly valued Nikkei 225 (trading at a P/E of 19.5), most other East Asian markets offer prospects of sustained economic growth and rising corporate profits. The Shanghai Stock Exchange Composite Index, for example, is trading at 14 times the earnings.

Given the worsening economic and political chaos in Europe -- and a near-certainty of credit tightening in the U.S. -- East Asia looks like a safe place to invest. It may well be one of the rare places where, a year from now, you might get some "lucky cash" in a beautifully decorated hong bao with a prancing dragon and an auspicious season's greeting.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.