Asia Becomes Epicenter of Market Fears Over Slowdown in Growth

Asia is emerging as the epicenter for investor worries over global growth and the spread of coronavirus variants. While their peers in the U.S. and Europe remain near record highs, Asian stocks have fallen back in recent months amid slowing Chinese economic growth and a glacial rollout of vaccines. The trend accelerated Friday with the benchmark MSCI Asia Pacific Index briefly erasing year-to-date gains for the second time in as many months.

“Asia was seen as the poster child in pandemic response last year, but this year the slow vaccination rollout in most countries combined with the arrival of the delta variant means another lost year,” said Mark Matthews, head of Asia research with Bank Julius Baer & Co. in Singapore. “I suspect Asia will continue to lag as long as vaccination rollouts remain at their relatively sluggish levels and high daily new Covid counts prevent them from lifting mobility restrictions.”

The growing jitters in the region comes as investor concerns shift from runaway inflation to an early withdrawal of stimulus by central banks. China’s authorities signaled earlier this week they may soon unleash more support for the economy, suggesting the world’s fastest-pandemic recovery may be weaker than it appears.

A fresh regulatory crackdown on Chinese tech stocks this week has also impacted investor sentiment in the region. The Hang Seng China Enterprises Index fell briefly into a technical bear market Friday, led by weakness in the sector.

While Asia bore the brunt of the retreat in global equities, havens in other asset classes from Treasuries to the yen have rallied, and the rotation toward economically-sensitive cyclical stocks from their high-priced growth counterparts continued to unwind.

“It’s a sign of how challenging the reopening process is,” Marvin Loh, State Street senior global market strategist, said in an interview with Bloomberg TV. “What the PBOC is going through as well as these variants that keep popping up around the world shows it’s going to be an uneven process. Maybe a normalization tightening policy is not necessarily going to be as fluid.”

Covid Challenge

Covid 19 remains a key challenge. In Japan, Tokyo has declared a renewed state of emergency to combat the resurgent virus, banning spectators from the Olympics and pushing the Nikkei 225 Stock Average toward a correction. South Korea is intensifying social distancing measures in Seoul while Indonesia is battling a virus resurgence that has crippled its health system.

“Asian equities are being particularly impacted by the rebound in coronavirus cases in the region, fears about the impact of that on regional growth and concern that we may now have seen the best of the rebound globally,” said Shane Oliver, head of investment strategy with AMP Capital Investors in Sydney. “Asian shares may have led the way on this but coronavirus concerns may also weigh on global shares generally.”

For the APAC region, recent trade deals will likely invigorate and deepen economic integration over the coming few years. In late 2020, China, Japan, South Korea, Australia, New Zealand and 10 Association of Southeast Asian Nations (ASEAN) members signed the Regional Comprehensive Economic Partnership (RCEP) agreement after eight years of negotiation.

When fully implemented in 2022, RCEP will represent the world’s biggest trading bloc, covering about 30% of global GDP and trade. In addition, China concluded a Comprehensive Agreement on Investment (CAI) with the EU on the last day of 2020. The EU is China’s second-largest trading partner and the CAI will cover broad market access, including to key sectors such as alternative energy vehicles and medical services.

Although these trade deals will not have an immediate economic impact, in the medium term the treaties should cement Asia as the world’s most dynamic economic bloc embracing free trade, investment and globalization. They should also help to counter the disruptive geopolitical tensions and encourage the post-pandemic economic recovery in Asia.

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Critics:
The economy of Asia comprises more than 4.5 billion people (60% of the world population) living in 49 different nations. Asia is the fastest growing economic region, as well as the largest continental economy by both GDP Nominal and PPP in the world. Moreover, Asia is the site of some of the world’s longest modern economic booms, starting from the Japanese economic miracle (1950–1990), Miracle on the Han River (1961–1996) in South Korea, economic boom (1978–2013) in China, Tiger Cub Economies (1990–present) in Indonesia, Malaysia, Thailand, Philippines, and Vietnam, and economic boom in India (1991–present).
 
As in all world regions, the wealth of Asia differs widely between, and within, states. This is due to its vast size, meaning a huge range of different cultures, environments, historical ties and government systems. The largest economies in Asia in terms of PPP gross domestic product (GDP) are China, India, Japan, Indonesia, Turkey, South Korea, Saudi Arabia, Iran, Thailand and Taiwan and in terms of nominal gross domestic product (GDP) are China, Japan, India, South Korea, Indonesia, Saudi Arabia, Turkey, Taiwan, Thailand and Iran.
 
East Asian and ASEAN countries generally rely on manufacturing and trade (and then gradually upgrade to industry and commerce), and incrementally building on high-tech industry and financial industry for growth, countries in the Middle East depend more on engineering to overcome climate difficulties for economic growth and the production of commodities, principally Sweet crude oil.
 
Over the years, with rapid economic growth and large trade surplus with the rest of the world, Asia has accumulated over US$8.5 trillion of foreign exchange reserves – more than half of the world’s total, and adding tertiary and quaterny sectors to expand in the share of Asia‘s economy.

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