Emma Wall: Hello, and welcome to the Morningstar series 'Market Reaction'. I am Emma Wall and here with me today to talk about the future of the global economy, specifically its effect on Asian equities, is BlackRock Asia Fund Manager, Andrew Swan. Hello, Andrew.
Andrew Swan: Good afternoon.
Wall: So, the IMF has downgraded global forecasts for economic growth. They've suggested this is because of weakness in Japan and Brazil and the Eurozone. Looking at Asia, what do you think the outlook for the economy is for that region?
Swan: So, Asian growth has stabilised this year versus the downdraft that we've seen in the last couple of years, which is I think a good sign for markets and that's really what we are looking for is a bit more stability in growth as opposed to acceleration of growth. The reason that growth has stabilised in Asia, there are a number of parts to that, but one of those is being better global growth. So, the global growth outlook is important. And it's been again a bit of a downdraft the last couple of years on Asia.
But the other reasons growth has been better this year, or stable, has been probably to do with the local monitory policy where we have seen financial conditions, things like interest rates moving down within Asia and that's also been a point of stability for growth in the region, which is important for equities because there is a pretty high correlation between growth and equity returns for Asia as a whole.
Wall: How much does China lead the way within that region? The old saying is, 'If America sneezes, the rest of the world gets a cold.' Is that the case for China within that region?
Swan: Yeah. China is about half of the regional GDP in a reported basis. But clearly, what happens in China also influences other parts of Asia. So, the impact is much bigger than just the half. So, what happens in China is very, very important for the rest of the region. And again, with China I think this year we're running at sort of in its low 7% type GDP range. That's pretty flat year-on-year to be honest, which is a good outcome versus the downdraft that we've seen in the last three, four, five years; in fact, we've come down from low-double-digits. So, I think stability is a good outcome at the moment.
Wall: And is that due to the new government and the reforms they are putting in place?
Swan: The reform process will enhance the quality and sustainability of growth long term. Short term though, there is some pain around some of these new policies of reform. There is clearly an anti-corruption process going on and that tends to be negative towards near-term growth. But they have been clever in terms of offsetting a part of that downward pressure on growth by easing financial conditions. So, you could see interest rates are lower than last year, so do ease policies within the property market to support growth as well. So, there are number of things that Chinese government can still do which is kind of unique relative to most central banks and governments around the world which have exhausted a lot of these monetary measures. China would prefer to not do too much more but they have that option if growth doesn't stabilise.
Wall: Economic backdrop is interesting for people like you and I, but for private investors they just want to know how is it going to affect their funds, how is it going to affect the stock market. How does it translate to real equity prices?
Swan: So, for Asia as a whole – and as we said, China is about half of growth in the region or half of the economy, it's clearly very important. If you go back over the last 30 or 40 years, there is a very high correlation between economic growth in Asia and Asian equity returns. Now, that relationship breaks down at the country level.
China's GDP is up about 80%, 85% in the last five years or four years and the stock market has done nothing. So, what's happened is the valuation multiples compressed, but that 80% sort of growth has actually benefited the rest of the region and the region's equity markets. So, it's really important to see what's happening with growth to determine equity returns.
And my view is what we need now in China and the region is actually stability. The big thing that we are looking for is the last four or five years it's been very fragile. So, what we are saying is we're moving from fragility of growth where people didn't believe the long-term trajectory that the process of reform across the whole of Asia, not just China, that will provide the foundation for better quality and more sustainable and stable growth.
So, we believe we are in a process of transition phase from fragility to stability right now in Asia in terms of long-term growth trajectory.
Wall: And will that bring volatility down?
Swan: It should volatility down, again, as long as it's managed well. We've had very volatile markets the last five years and we do think more stable economic environment will create less volatility. New term the recent volatility, we have exiting QE in the U.S. as an example of that which creates volatility and there will always be volatility for different reasons. But overall, if growth does start to stabilise, that would be very positive for volatility and returns.
Wall: Andrew, thank you very much.
Swan: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
