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Deleverage Essential In The West But With Dramatic Consequences For Growth And Social Stability

ER - Analyses de marchés
A different story for Asia, driven by domestic consumption and easing monetary policies

London, 9 November 2011 - Deleverage is a must in the West with inevitable consequences for growth and average standards of living, raising the very real threat of social unrest, according to Global CIO for Baring Asset Management, Marino Valensise, speaking at a briefing yesterday in Hong Kong on the 2012 global investment outlook. However, while recently out of favour, Asia has positive long-term prospects and remains a key hotspot for investors in 2012.

Says Marino: "For some countries in the West levels of debt in relation to Gross Domestic Product has passed the point of no return. The leverage problem has been transferred from the private to the public sector; this is a huge challenge in an environment of poor demographics and low inflation.

"There are three typical ways to counter government debt: the first is growth, to boost tax receipts: growth is hard to generate during a period of public and private deleveraging; the second is defaulting, something which is unthinkable and unpalatable for major G7 economies. The third is inflation, which would reduce the real value of outstanding debt over a period of time. Some inflation, also in nominal wages, would be an effective get-out-of-jail card, but it is difficult to get in the current deflationary environment in the west."

Inflation across emerging markets has been a serious issue over the past two years, however food prices and agricultural commodities prices have peaked - at least in the short term - and this opens the door for some monetary relaxation in selected countries. Marino expressed that he sees a potential, although not immediate, change in Chinese monetary policy as the main positive catalyst for the global equity markets going forward.

Wilfred Sit, Barings' CIO for Asia added, "While these global macro conditions and higher oil prices pose a risk to Asia, anticipated GDP growth of 7% next year, strong domestic consumption, favourable demographics and attractive valuations all point to Asia as a strong investment story over the long term. Looking specifically at China, there is a need to balance growth and inflation and we see no further acceleration of the tightening bias. With a weakening growth environment, we are likely to see some relaxation of policy in order to ease the tight liquidity situation. We might see some relaxation in banks' reserve requirement ratio and/or loan quotas. In light of a worsening growth backdrop, banks are recapitalising to prepare for non-performing loans, and it is no surprise that the small to medium sized banks with weak balance sheets will be hardest hit."

"What is clear is that China's growth will be increasingly driven by the domestic consumer, with per capita disposable income set to grow 7% each year for the next five years and the minimum wage to increase by no less than 13%. Service sector value-added output is set to make up 47% of GDP by the end of the same period and the urbanisation rate is anticipated to reach 51.5%.(1) This is clearly very positive both for banks, in terms of credit card issuance in a market of underleveraged consumers and lenders, and for consumer-related stocks."

In Asia in particular, Barings is focusing on equities and is overweight China, as well as positioning portfolios favourably towards Korea, Thailand and Indonesia. In terms of sectors, the firm favours quality companies in industries with more secular themes, such as consumer, infrastructure and technology.

(1). (Key targets of China's 12th five-year plan) The National Congress of the PRC, Mirae Asset Research as at April 2011

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