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Asia-Pacific cities in Tomorrow's World: Diversification hinges on resilience

Asia-Pacific cities in Tomorrow

Following our previous discussion about the benefit of a diversified global portfolio, this week, Harry Tan, Head of Research, Asia-Pacific, elaborates on the relationship between diversification and resilience.

There is little doubt that Asia-Pacific provides an excellent intra- and inter-regional growth diversifier to concentration risks within a global real estate portfolio. However, diversification is only beneficial insofar as the long-term, structural fundamentals of the invested economies are resilient. In recent months, there has been increasing concern over the outlook for global monetary policy, which will impact yield, pricing and the broader attractiveness of the real estate market at this late stage of the cycle. While we do not expect a sharp withdrawal of banking system liquidity support from major central banks, we are cognisant of the risks that will shadow the markets as interest rates continue to rise steadily over the medium term. 

Against this backdrop of peakish asset pricing alongside the rising risk of tightening financial conditions, how sturdy are regional economies today? The Asian balance of payments crisis in 1997 was driven by a mismatch between economic fundamentals vis-a-vis currency, leading to a sharp currency depreciation from speculative attacks, capital outflow and widespread corporate and household defaults. However, this time is different;
1. Better external defence: accounting for more than half of the world’s holdings, the region’s foreign currency reserves have climbed to more than US$6trn, from less than a trillion back in 1997. The strong pool of currency reserves means that the import cover (a rough gauge of currency stability) for most regional economies now stands at multiples of 1997’s levels and much more than the three months 'rule of thumb' that is adequately required. In the case of Thailand and South Korea, two of the worst hit economies in 1997, their reserves are six times and 18 times higher, respectively. Most regional economies now have a floating exchange rate (soft peg to the US dollar), reducing the need for central banks to actively intervene in the currency markets. Current account balances(a measure of trade and financial flows) are also in much better shape now than in 1997, placing the region in a more positive position in the event of an external crisis (Fig.1 and Fig.2).
2. Stronger internal resilience: the 2008 Global Financial Crisis (GFC) and most recently, the moderate economic downturn, has driven policymakers to engage in higher fiscal and monetary stimulus, helping to support economic conditions. As a result, the build-up in savings from the relatively robust labour market and rising asset values, particularly through the housing market, have helped to strengthen household balance sheets. 
 

Fig.1: Stronger buffer to growth 

 

Source: Oxford Economics, 2017

Fig.2: More resilience to external risks

 

 

Source: Oxford Economics, 2017

Largely driven by the rise of the Chinese middle class, Asia-Pacific by most accounts is the wealthiest regional bloc in the world. Rising wealth in turn can help to mitigate against any crisis related to a pullback in consumer spending. If anything, most regional economies need to spend more and save less, in order to reduce the reliance on investments and exports to support growth. China is a good case in point; the soft, managed slowdown in recent years reflects a coordinated effort by policymakers to rebalance credit-driven investments towards urbanisation driven services and consumer-led growth (Fig.3 and Fig.4). 

Fig.3: Among the highest savers

  


Source: Oxford Economics, 2017
 

 

Fig.4: Robust household balance sheet

 



Source: Oxford Economics, 2017

Heightened worldwide economic, political and policy uncertainties after the GFC have only amplified Asia-Pacific’s growing importance, particularly through a relatively more resilient economic climate. The region is also a hotbed of global megatrends, which will help to provide a strong anchor-to-asset value across the region’s core and growth markets.

 

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