Tuesday, July 21, 2009

U.S. is the engine, but Asia will lead

Whatever level of recovery develops in the next 12 months, and may that concept be so, the U.S. market is essential to rebuilding global confidence. A sense that the U.S. consumer in the aggregate has stabilized will be positive home and abroad. This evening Apple and Starbucks results reflected, at a minimum, that life has not stopped, that capacity exists for the right products and concepts.

As any recovery develops it is likely that despite the immense importance of a U.S. recovery, Asia will ride that to a faster pace of growth with better long term prospects. Why? In 1997 the Asia currency crisis had a significant impact on the global markets, really frightening, but on the ground in Asia it was terrifying. They did not forget that experience and Asian corporates in general came into the current crisis with good balance sheets, solid capital positions, meaning less debt. Most Asian governments have since avoided irrational and unexpected market interventions, Thailand being the exception, and there has been a slow expansion of the middle class, or maybe in parts of some countries it has just been a general advance from abject poverty to subsistance living. The point is that there has been economic progress.

In this current crisis, and before, government spending has been directed at major infrastructure development broadly in non-Japan Asia. In China, in particular, the reaction to current stressed global economic conditions has been a ramped up investment in infrastructure spending, more efficient power plants, power grids, roads, water systems, sewage plants, you got it, infrastructure for the future. Sure, there will certainly be see-through office towers in Beijing as they overbuilt for now, and hotels that are too advanced and big for the current economy, and all of that will retrench. The majority of the investment, however, has been made in the basics that will build growth for the future. The other aspect of this is that with a one party political system, unattractive as that is to most of us, they were able to adjust and invest rapidly as the economic crisis unfolded.

Asia will not come out of the economic downturn quickly without the U.S. leading the way. With their more conservative balance sheets, growing consumer base, and driven infrastructure development, however, the growth there may finally "decouple" from the U.S. as recovery begins to be apparent in 2010. When it eventually becomes based on real economic value-added productivity and not just cheap labor, their equity markets will blast off.


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