The first four sessions of Commonwealth Bank’s 10th annual Global Markets Conference in Sydney on Monday 29 October gave investors a detailed overview of the Asia Pacific region – the macro-economic backdrop, prospects for the credit ratings of Asian corporates and likely demand for Australia and New Zealand’s commodities.
The world’s new growth engine
Trade tensions between the US and China, along with rising interest rates in the US, are denting businesses’ optimism about export orders around the world. However, overall manufacturing orders are holding up due to strong domestic demand. That is one of the insights from IHS Markit’s global suite of Purchasing Manager Indices (PMIs).
Each month IHS Markit surveys more than 27,000 manufacturing and services companies in over 40 countries that represent 87% of global GDP to calculate the PMIs. Rajiv Biswas, Senior Director and Asia-Pacific Chief Economist at IHS Markit, said the PMI surveys are closely watched by central banks as they have proved to be a very good leading indicator of the outlook for the economy.
IHS Markit supplements the PMI surveys with its own macro-economic modelling. From that modelling it predicts that China will be the biggest growth engine over the next 10 years. It will account for about 30% of the world’s economic growth, said Biswas. Meanwhile India will contribute around 10% of global GDP growth in the coming decade. “This makes Asia-Pacific the most important growth engine in the next 10 years,” Biswas said.
Robust credit fundamentals in Asia
Moody’s Investors Service has a similar view. Dr Michael Taylor, Managing Director, Chief Credit Officer Asia Pacific at Moody’s Investors Service, said the credit rating agency sees Asia as a major growth engine for the global economy despite the continued slowdown in China’s economy.
According to Taylor, emerging Asia now represents 22% of the world’s economy (up from 12% in 2008) and Asia as a whole will account for 34% of the global economy this year, compared with 25% 10 years ago.
Despite rising US interest rates, Taylor provided reassurance on the credit rating outlook for the Asian corporates that Moody’s rates. That’s because most of the companies that have borrowed in US dollars have either natural hedges or financial hedges in place. He noted that capital flows into Asia have held up pretty well. A contributing factor is “Asia-fication”, namely regional investment funds and insurers beginning to buy Asian financial assets.
Focus on quality in commodities
The overarching theme of the presentation by Leonard Rowe, Director Business Development, Asia-Pacific at AME, is the growing importance of quality in commodity markets. For example, the shortage of very high quality thermal coal is attracting the interest of private equity companies. Rowe also pointed to the structural change in the pricing differential between iron ore with 58% Fe and 62% Fe.
He too was upbeat on the outlook for commodity demand given China’s One Belt, One Road multi-continent infrastructure initiative will generate continued demand for steel.
However it isn’t too late for investors to get involved in the commodity sector. Bruce Turner, Director of Central Portfolio Management at Fonterra, sees a huge opportunity in the dairy market compared with other soft commodities.
According to Turner, dairy is similar to oil in that it is a high-quality product with lots of price volatility and the market is supply-driven. Dairy is a 406 billion litre market but only 1/6th of the market – 66 billion litres – is traded. “People like trading sugar because it has a lot of leverage – 3:1 – but dairy has even more leverage – 6:1,” said Turner.
All up, the four presenters suggested there are many interesting ways for investors to benefit from Asia’s growth story. And as Biswar commented, “It is a pretty positive story for Australia to be linked with this region.”