It Seems Likely Asia Will Have Relative Growth Outperformance

Asia’s role in driving global growth

Michael, let’s turn back to China, which recently announced the weakest economic growth it’s had since 1976, barring the first year of COVID in 2022.10 China’s population doesn’t seem to be growing like it used to. What is your outlook for China, which has so often been an engine for global growth?

Michael: I would make a couple of points in terms of the short-term dynamics, but also the long-term structural evolution of China. For decades as China has grown and become a bigger and bigger economy, it is natural and expected that the rate of change will slow. That being said, last year’s severe lockdown amid zero-COVID policies really plunged that growth to an exceptionally low level. China’s growth rate was around 3% for the full year 2022, less than half of what it saw the year prior. Now we are seeing an amazing pivot where zero-COVID has been lifted and there is a full opening up of the economy across the board. This has led to virus surges and then immunities—a very accelerated path of working through COVID-19 compared to many other countries but reopening is underway and will lead to a resurgence in domestic economic activity. This will have some spillovers globally, whether it’s Chinese tourists traveling to other countries or further easing of supply chains that were still sticky. I think that is a meaningful positive that’s happening pretty quickly.

That said, China will not likely have the type of growth surge it saw post-GFC, where there was incredible stimulus and demand for commodities globally and into China. So far, policymakers have indicated a lot more caution. There has been an acceleration of stimulus to the real estate market, and openness to stimulate monetary and fiscal policy, but of a lot lower magnitude than we’ve seen before. So, we see some acceleration in growth, but not the double or even high single-digit growth of decades past. Those days are behind us.

So, Michael, you are probably one of the great investors over the last 10 years to spot the growth of emerging markets. What do the next five or 10 years look like for global growth, in your opinion? Michael: It’s not just about China, but if China could grow 4% to 5% over the next couple of years, given the size of its economy, the magnitude of that additive demand effect globally would be very meaningful. It’s an open question whether China can do that. There are always geopolitical risks and other things that could affect that outlook, but barring those, it does appear that’s manageable. I think the bigger question is about the economic model 10 years out.

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Also, as Sonal mentioned, everyone thought Europe would face energy shortages this winter amid the ongoing Russia-Ukraine war, but because of factors such as warmer- than-expected weather, that hasn’t occurred. So, Europe seems unlikely to face the type of downturn that had been feared a few months ago, and I think the outlook can be considered fairly encouraging. When I think about pockets that can shine, I think about Asia. According to the latest International Monetary Fund forecast, GDP growth in the United States is seen at 1.4% this year, and Japan’s at 1.8%.11 Japan has not been in a position to outperform the US for over a decade. It’s a real meaningful adjustment. And emerging and developing Asia is looking at close to 5% growth this year. For the United States and Europe, maybe recession or no recession, we can debate that, but there is a downshift. That does not mean that growth everywhere is imploding, and Asia is one of the bright spots.

 

Currency considerations: moving away from US dollar-assets

Michael, you’re really obviously looking at things more globally. How do you look at currencies within the context of this discussion?

Michael: There are big geopolitical risks out there that can alter these central scenarios, and certainly in the currency space there is no certainty. But we are seeing some pretty big opportunities in non-dollar assets right now. We’ve started to see the dollar’s strength ebb over the past month, although these sorts of moves won’t necessarily be in a straight line. It’s not a uniform dynamic when looking at the US dollar versus various countries, so we have to be nimble and constantly adjust between countries, between regions. But generally, with fed funds getting close to a terminal rate— we can debate the exact number but we are getting close to that range—this seems to have taken away a big support element for the dollar. The recognition that growth in Asia is likely to outperform that of the United States’ is not without risks, but it seems likely Asia will have relative growth outperformance. And, the United States is still running these big fiscal deficits, and the debt ceiling debate keeps coming up, because the United States is spending a lot of money and still has a huge import bill.

These issues are going to present investors with opportunities though. The pie is opening and there are different parts of the pie for investors to diversify with. I’d say one sliver of that is the non-dollar space. If people believe that the dollar is at a peak and has already started to decline, we think the non-dollar space is exciting. It’s not without risk, but valuations point to that as a good opportunity.