Interdependent world

Asia is not as dependent on the US as it was, but globalisation means that its impact will always be felt. Richard Lowe reports

The lasting attraction of the Asian real estate markets over the past 10 years has been mainly attributable to the dynamism of the economies underpinning the region. The double-digit GDP growth of the economies has powered the extraordinarily high real estate investment returns seen in recent years and has made for compelling investment cases for European institutions.
However, such high levels of growth are impossible to sustain in the long term, something that could be proved true sooner rather than later as the world's largest economy, the US, braces itself for recession. Today, commentators speak of a global economy, whereby local economies are more closely correlated and interdependent on each other. If the world's economies truly are globalised, a major slowdown in the US could seriously threaten the long-running Asian success story.
However, one line of thought says the Asian economies are becoming increasingly independent of the US, despite most of their recent growth having been greatly fuelled by the voracious appetite of the US consumer. The notion that Asia has decoupled has been a point of debate for economists and commentators.
For global real estate investors it is a matter with serious implications. If European institutions are continuing to target greater exposure to Asia Pacific within their global portfolios, the extent to which the region has decoupled from the US will have a significant bearing on their overall investment performance.
The ‘d' word proves to be fairly contentious and at times divisive, depending on whom you talk to, even among German pension fund managers, for example. "I am one of those people who believe in the decoupling theories," says Günther Schiendl, CIO and member of the board at VBV Pensionskasse, Germany's largest pension fund. "I believe the fundamental ground is there for a decoupling of Asia. The story for Asia has very much to do with population growth, economic growth, inter-Asian travel - all these kinds of things. That to me is essentially a very strong story."
In contrast, Herman Aukamp, CIO of German doctors' pension fund NAEV is largely sceptical of the decoupling argument. "People talk a lot about decoupling," he says. "We see some problems with these decoupling stories."
However, such apparent division on the subject may be misleading. It would be very difficult to argue that economies in Asia will be completely immune to the effects of a US recession or slowdown. However, there does seem to be a growing consensus that they are in a much better situation to maintain a fairly positive outlook than they were during previous global economic downturns. One factor that supports this line of thinking is that the Asian economies have diversified their exports to other parts of the world outside the US, including a much greater inter-regional trade within Asia itself. This would dampen the effect of a US recession, although it would still be felt.
Indeed, Aukamp believes more specifically that the Asian economies "will not decouple 100%," implying there is potential for it to happen to some degree.
Lee Menifee, director of global strategy for CB Richard Ellis Investors, believes Asia has evolved from a region almost totally dependent on demand for goods and services from North America and Europe, to one that "has a significant intra-regional growth component".
He adds: "That is true both of developing economies and of more developed economies such as Japan, which now counts demand from China for its products and services as one of its main demand drivers. Clearly, a slowdown in the US would have a meaningful impact on Asia's economic growth, but it is better positioned now than it was a decade ago."
Nick Wong, managing director for Asia Pacific at ING Real Estate Select, the multi-manager business of ING Real Estate, agrees: "A lot of the growth is coming from exports and yes a lot of the exports will be hit, but at the same time, if you look at Vietnam and China, a lot of export has been diversified away from Europe and the US towards the Middle East countries and also within the Asian region itself. Therefore although the impact will definitely be felt on exports, it will be less than before."
Robert-Jan Tel, head of real estate investments at TKP Investments, which handles the investment management for the Dutch telecoms and postal pension funds, agrees that Asia will not be "completely immune" to the fallout of a US recession, but believes that growth in a number of the region's economies will remain strong.
"The US is a big part of the world economically and in the flows of goods and money, so there will definitely be an effect," he says. "Maybe the growth will be a little lower than in previous years, but we expect absolutely it will be well above a European average."
GDP forecasts are certainly moderating. The World Bank, for example, cut its China GDP forecast in February from 10.8% to 9.6%, while the International Monetary Fund maintained a 10% projection. This is a significant decrease on its 11.4% economic growth in 2007. However, it is still hovering on or just below the double-digit region.
"My general view is that things are still quite upbeat," says Jenny Buck, head of global property multi-manager at Schroder Property IM. "People are expecting a US recession to have a bit of a knock-on effect, but will say: ‘If I've been having 12% GDP growth and I fall back to 7-8%, it is not necessarily a bad thing."
David Edwards, director of Asia Pacific research and strategy at LaSalle Investment Management believes that the term ‘decoupling' and its various derivatives - ‘coupling', recoupling' - have probably been "a bit overused".
He explains: "Our general feeling is that decoupling is counter-intuitive. We have an increasingly globalised economy and as a result of that there is nowhere that decouples from anywhere else."
However, having said this, Edwards believes that Asia's reliance on the US is now significantly lower than it was 10 years ago. Exports to the US as a percentage of total worldwide exports have been falling over that period.
"There is less reliance on the US, but of course there is some reliance on the US. As the US is the world's largest economy that is not surprising," he reasons. "Weaker growth or possible recession in the US will have some impact on Asia. We have already seen that in the projections going forward."
In fact, LaSalle Investment Management's forecast for Chinese GDP growth is actually more conservative than the World Bank's. "In China we are expecting growth in the order of 9%, coming off 11.5% last year," he reveals.
Elsewhere, in Hong Kong, Singapore, Malaysia and Korea, LaSalle IM predicts growth closer to 6%, and in Japan it is already perceiving a slowdown, with no growth in exports to the US at all. "So some of that has already filtered into the data," Edwards concludes.
 "The corrections for projected growth have already built in expectations of weaker growth in the US and the knock-on effect that has everywhere. We are coming off higher levels, but we are still going to get attractive returns throughout the region."
As the second largest economy in the world, Japan plays a pivotal role in the decoupling game. "It is quite an export-orientated country and although it has been taking a lot of steps to try to build up its trade with China, it is still quite vulnerable to the US," says Buck.
Cheng-Soon Lau, managing director at Invesco Real Estate Asia, agrees that both Japan and China are part of the global economy and are "clearly a major part of the supply chain to the developed world".
He adds: "While the domestic consumption of major Asian countries has been rising over the last three years, domestic consumption growth may not be sufficient to fully offset a fall in exports as a result of an economic slowdown or recession in the developed West.
"The expectation is that Asian economies will experience a slowdown as a result of a recession in the US but may not slip into recession themselves."

However, the emergence of trade protectionism in the US could exacerbate the effects of a US recession. "A large potential problem could be the possible rise of trade barriers in the US as a result of recession and political change," Cheng Soon adds. "This could hurt growth in the region more than currently expected and consequently dent market demand."
But he still believes the Asian markets "continue to look attractive over the long term for institutional investors". This positive outlook is bolstered by the fact that such countries as Japan and China benefit from governments with large current account surpluses.
"The hope is that the efforts by the Chinese government to spur domestic consumption, and the efforts of the Japanese government to do the same, could yield more success," he says.
Wong agrees. "Most governments have strong current account surpluses," he says. "Therefore they have a lot of room to boost their fiscal policy and also have a very high saving rate to sustain the current economic growth."
Edwards certainly believes this is the case for China. "Our expectations are that, if things start to slow too much in China, then the government will take its foot off the brakes," he says. "If really necessary, the government will prompt prime economic expansion through capital projects. The outlook, therefore, is positive in the short to medium term for sure in China."
There is also the matter of the credit crunch, which seems to have largely bypassed the Asia Pacific region, although it is becoming harder to raise debt in Japan. Japan's financial institutions have so far avoided the sorts of high levels of sub-prime-related losses as their overseas rivals, but they have by no means remained unscathed. Shinsei bank, for example, has reportedly been forced to sell its Tokyo headquarters to help cover a $300m (€193m) loss on investments in the US mortgage market.
"Most recently, the debt markets have tightened up considerably," says Edwards. "Expectations are that the Japanese banks will report losses - probably not on the same scale as the major US banks - but the banking sector has turned really quite cautious in response to that. But debt is still available to good quality credit companies and investors and it is back to relationship banking - if the bank knows the customer and the customer has a good track record, there is still debt available."
Buck agrees that the credit crisis has not had an adverse effect on markets such as Hong Kong and Singapore, but Japan is the one region experiencing "a notable effect".
She says: "Up until December, people were carrying on, banks were lending, but there has been a marked shift between December and February. Talk varies between people you spoke to, but generally the feeling is that some people are struggling to get any form of bank finance."
Those in Japan who can raise debt are finding that it is much more expensive and "the covenants are a lot tighter", Buck says. "It is very much on those established players who have relationships with the banks. The securitisation market has virtually closed down in Japan."