‘Enjoy the Asian asset bubble while it lasts’

Monetary policy in the West will remain easy in response to anaemic economic growth, but the prime beneficiary of this will be investors in Asia, where asset prices will boom — and likely even get bubbly, says CLSA equity strategist Chris Wood.

“We’re going to witness an extended period of weak, sub-par growth in the West, forcing governments to keep their interest rates low,” says Wood. “My base case is that monetary policy in the West will remain easy, which will be way too easy for Asia.”

This, he reckons, is the trigger for “overwhelming probability of Asian equity outperformance, leading potentially to Asian asset bubbles.” It’s likely that Asian central banks will not tighten pre-emptively, which gives investors an opportunity to ride the bubble for a while.

China and India, in his estimation, remain great long-term growth stories, and the two nations have “for all practical purposes” decoupled from the US so far this year. For global investors, India is a good complementary investment to China. “You don’t want to bet all your money on China, and India complements China particularly because they are so different from each other.” 

In India’s case, says Wood, the growth story for the next five years is related to investments in infrastructure, and not necessarily a consumption story. He remains structurally overweight India and China, he adds.

If a bubble does build up in Asia, its epicentre will most likely be in China, but rather than be wary of a bubble, investors can profit from it, reckons Wood. “You should be more overweight Asia if you sense there is an asset bubble on the way, because it will lead to massive outperformance.”

Obviously, he says, at some point you want to worry about the peak of the bubble, “but we’re not there yet.” Asia’s fundamentals are good, and western governments are creating easy money, which, being fungible, will find its way here.

The rally in US equities was more in the nature of a “relief rally” and in anticipation of a recovery, but disappointment will likely set in next year as it becomes clear that US gowth is going to remain anaemic, and is not a normal recovery, says Wood.

Investors in the US have been ignoring consumption and unemployment data, which are lagging indicators and which show the recovery to be fundamentally weak. And although the US housing market looks like it is at or close to a bottom, it isn’t likely to rebound anytime soon. “I don’t see a sudden pick-up; it’s more likely to bump around at the bottom for an extended period,” says Wood.