Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Robert Horrocks, CIO of Matthews Asia.
Hi, Robert.
Robert Horrocks: Hi.
Wall: So, the last 12 months have been pretty good for Asia against quite a challenging backdrop. Almost every single market within the region has rallied. What's driven that?
Horrocks: Well, I think, a lot of it actually is just the sort of relief response because the markets had sold off earlier. It's a response to the Fed policy which had been perceived to be getting tighter and then loosening up and now maybe tightening again and so the market has gone through a bit of a rally because of that.
I do think there are other elements coming through though. And one of the things I would say is, look at governments across Asia. They are quite reformists. You're seeing a lot of reforms to the legal and institutional structures in India. You're seeing China making headway at cutting down some of its excess capacity. You're seeing corporate governance reforms across the region and I think that's building a sense of growing earnings, corporate profits to come out of the region and that's what sustaining this sort of latter stages part of the rally.
Wall: If you look at the things which were turning sentiment against Asia 12 months ago, it was the threat of Fed rate rises. It was concerns about China's debt. Have those concerns been assuaged or are they still looming on the horizon?
Horrocks: Well, I think, they have been assuaged, but I think the main one of those is Chinese debt. And I think the difference is that back at the beginning of this year it was the feeling that there was going to be an immediate systemic meltdown and I think worries about debt are still there, but they have changed to an understanding that it's probably not an abrupt meltdown. But this is going to be a headwind for growth that the Chinese will have to work through over the next two, three years.
I'm originally from Newcastle and I remember how the Northeast of England used to be encumbered by the coal mines, the all traditional industries that were inefficient and needed to be shut down and all of the political and social upheaval that came from that in the sort of early 80s. Well, the Northeast of China is a lot like that as well now.
They have a lot of these dead, dying industries that need to be shut down. But the Chinese don't want to go through the same kind of internal political and social upheaval. So, whilst they are going to do their own attempts of restructuring these old industries, they will take it slowly. That's where a lot of the debt is.
That's the reason why the debts are a bit of a headwind for growth. And I do expect it to weigh on sentiment a little bit for the next couple of years or so. But also, I would say that because we had this slightly panicky reaction earlier on, valuations have already got down to a point where they are quite attractive.
Wall: Of course, Asia does not exist in isolation, although it is a very heterogeneous region with its own opportunities and challenges. And we're speaking on the day of the U.S. election and typically, the U.S. dollar and indeed, U.S. central bank policy has had a big impact on Asia, on emerging markets as a whole. Looking into the next 12 months, do you expect the rally we've seen over the last year to be dampened going forward because of the threat of that sort of U.S. change?
Horrocks: This is a rather bizarre election in the U.S. and I think the U.S. is coming to that conclusion itself. In spite of all the contradictions between the two candidates there's one area on which they both agree, that is the need for more infrastructure spending. So, they are both, whoever wins, would try and push that through. That means more government spending. The Fed has already hinted that it would offset that with tighter monetary policy. So, I think what you have there is a scenario that in the short term at least might be dollar strong, higher interest rates.
That's typically been a poor environment for emerging markets. But I think across the emerging markets Asia is much better placed from a policy perspective to offset that external shock with more government stimulus or monetary policy of its own. The reason I say that is they tend to have higher savings, current account surpluses, low structural inflation and I would expect that domestic fiscal policy to take the form of tax cuts which are probably quite supportive for the consumer. So, again, I think, whilst it's not an ideal environment, Asia is quite well placed to deal with it.
Wall: Robert, thank you very much.
Horrocks: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
