The theory of Asian decoupling has suffered from a focus on short-term economic and equity market performance, with the result that for some it has been disproved. However, we do not believe that recent experiences, whilst undoubtedly difficult for Asia, mean that decoupling in the long-term cannot take place.
We have said for some time that we believe the process of decoupling will occur over a period of around 20 years and that we are roughly half way through the process.
In explaining our views, it is important to distinguish between the types of challenges that Asia and the West are facing. Asia is experiencing a cyclical slowdown as demand for the types of durable goods for which the region is well known has declined sharply. Western economies are in the midst of a recession borne of structural financial sector crisis, the ramifications of which could be felt for many years to come.
In contrast, Asia's financial sector is generally well capitalised and has limited exposure to toxic assets. As a region, Asia is structurally sound, benefiting from low levels of debt across the corporate, consumer and government sectors.
This is in marked contrast to US and European counterparts and provides Asia with the foundations firstly for recovery but also for enduring long-term growth.
Asian authorities have drawn upon their financial strength to help slow the economic downturn. Policy actions have provided support to the financial and corporate sectors and have boosted spending, particularly in respect of infrastructure, which has been the cornerstone of many regional stimulus measures.
Investment in infrastructure has the potential to support short-term activity and also to provide the groundwork for increased productivity and efficiency in the years to come. In addition to new spending, the immediate need to stimulate activity has seen planned expenditure on major projects brought forward, accelerating key areas of Asia's development.
The current global crisis has underlined that the economic prosperity of many Asian economies continues to be closely linked to export demand. However, the downturn has the potential to expedite the evolution of these economies towards internal sources of demand. Policies to actively encourage domestic consumption have already been seen, particularly in China, where the consumer sector is still in its infancy.
This offers a source of growing and sustainable demand and high savings rates give Chinese consumers the means to be a strong source of future economic growth. Government measures to improve areas such as public health care, education and pension provision will also be important in the process of giving consumers the confidence to spend.
The performance of China remains important for Asia and whilst first quarter GDP growth of 6.1 per cent year-on-year was the slowest in almost a decade, it appears likely to have marked the trough in the current cycle.
Some indicators of activity, including industrial production, have been improving and support signs that stimulus measures are feeding through to the real economy.
China's relative lack of dependence on exports and aggressive monetary and fiscal support have enabled it to maintain positive growth.
In our view, decoupling over a meaningful period is occurring. The demographic profile of Asia is strong, consumers and businesses are generally in sound financial shape and as social and economic development continues we expect domestic sources of demand to increase in significance.
This would represent a fundamental shift in Asia's economic development and is likely to be a gradual process. We believe that while Western economies adjust to their previous imbalances, history will look back on the current difficulties as another step in Asia's ongoing maturity and increasing economic independence.
- The author is Head of Asian Equities at UK-based Invesco. The views expressed are his own
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