Schroders Asset Management: Japan’s Abenomics? ASEAN? & Thailand?


Lots of talk currently about Japan’s Abenomics, the name given to Japam’s PM, Abe, economic thinking, of battling a decade old deflationary trap that have zapped conpetitiveness as priority, and doing everything, in raising inflation to help devalue the Japanese currency, Yen, and help to get the manufacturing activity up with cheaper export. All of that, when Abenomics was started by Abe, many were screaming “Currency War.” Then Japan’s economic picked up, and the stock market zoomed, anticipating better listed firms bottom-line. Well, everything worked great, for a while, but the Japanese stock market, have tanked lately.

Many now say Abenomics have and will fail, and many are asking what is the impact on the globe. And in the Asia region, many are asking about the impact on ASEAN. And here in Thailand, many are asking what does Schroders think.

The following is from CNBC: (Source)

If Japan’s ambitious plan to pull its beleaguered economy out of a deflationary rut falls flat this year, it won’t be the only country that feels the pain, economists at asset management firm Schroders have said.

Although the first two arrows of ‘Abenomics’ have had some success in creating inflation and economic growth, naysayers have cast doubt over whether Prime Minister Shinzo Abe can pull off the third arrow of his plan – structural reform. Thus, they are fearful that the upcoming consumption tax hike in April could damage Japan’s economic recovery beyond repair.

According to Craig Botham, emerging markets economist at asset management firm Schroders, if Abenomics does fail, emerging markets will be left vulnerable.

“We highlighted a number of risks to our baseline forecast [for emerging markets], one of which was a scenario where Abenomics fails,” said Botham.

“In the event that yen depreciation does step into overdrive, the most likely impact seems to be on Asian emerging markets’ exports to Japan, particularly in the absence of another round of emerging market currency exchange depreciation,” he added, referring to the selloff the region suffered in mid-2013 amid concerns the Federal Reserve would taper its asset purchase program.

In the firm’s most extreme downside scenario, if the tax hike pushes the economy back into recession, the Bank of Japan will be forced to step up its asset purchase program, further weakening the yen to a level of around 130 to the dollar.

At these levels the yen would create two key disadvantages for other countries in the region: a reduction in domestic demand for foreign imports; and it would make Japanese goods more attractive, giving Japanese exporters a competitive advantage.

“Assuming that Japanese companies use the fall in the yen to cut prices (rather than just boost profits through higher export revenues), those who compete with Japanese companies will feel a squeeze on their market share,” said Botham.

Schroders pinpointed South Korea, Taiwan and the Philippines as the most vulnerable to both weaker import demand and Japanese exporters’ increased competitiveness.

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Europe, the Middle East and Africa, meanwhile, would be the least vulnerable, with Latin America somewhere in the middle.

“Given that the consumption tax comes into place in the second quarter, and we see a strong Bank of Japan response occurring in the third quarter in this scenario, it may be that South Korea, the Philippines and Taiwan perform well only in the first half of 2014 before beginning to struggle,” he said.

However, Schroders added that these countries’ policy makers may well take steps to mitigate the negative effects of a weak yen by implementing monetary or fiscal stimulus. South Korea and Taiwan, in particular, enjoy small fiscal deficits and low inflation levels placing them in a strong position to do so, if necessary.

Frederic Neumann, co-head of Asian economic research at HSBC, said he was not too concerned about the impact a failure of Abenomics would have on emerging markets, however.

“Most economies in Asia do not compete head-on with Japan, being far lower on the production chain. South Korea is a notable exception and Taiwan partly so, and here a weaker yen could deliver a squeeze on corporate profits,” he said.

“But, in other parts of Asia, including China, the impact will likely prove more limited. Last year, despite a 17 percent depreciation of the yen against the dollar, foreign direct investment flows from Japanese firms to ASEAN markets still rose, along with bank lending. To the extent that a weaker Yen reflects such capital outflows, a number of ASEAN markets may in fact benefit,” Neumann added.

Raj Biswas, Asia-Pacific chief economist at IHS Global Insight, agreed that a rapid depreciation in the yen could give Japan’s trade partners cause for alarm.

“The U.S., E.U. and other key trade partners may become increasingly concerned if the yen depreciates sharply further from current levels,” he said.

Schroders also added the caveat that changes in the exchange rate are not the sole driver of trade flows and a number of other factors are involved, such as commodity prices and the strength of the global economic recovery.

The following is from Citywire

Investment trusts: Dobbs calm on Thai stake as Bangkok hit by protests

by Max Skjönsberg on Feb 14, 2014 at 13:03

Matthew Dobbs is sticking by his Schroder Oriental Income Fund’s 7% exposure to Thailand, despite political unrest, eyeing companies’ commitment to dividend payments.

Despite political conflict, Thailand remains one of the biggest country bets in the £355 million Schroder Oriental Income Fund, making up 7% of the portfolio. Schroders plc is a global asset management company with $415.8 billion* under management as at September 30, 2013

Despite violent demonstrations in Thailand in recent months, Matthew Dobbs, who has managed the trust since it was launched in 2005, is sticking to his strategy.

‘You have to make a bit of a calculation on politics, and I don’t think 7% is too much considering things generally get resolved,’ he said. ‘We have been buying more in Thailand over the volatility we have seen. One good thing is that because many of the companies know they are operating in an unstable environment, they are run on a pretty conservative basis.’

Dobbs is based in London and travels to different markets in Asia each year. His latest trip was to Thailand last November.

‘One theme that came out of my visit in November was how highly committed many of the high-quality Thai companies are to good, healthy payments to shareholders through dividends,’ he said.

He cited the trust’s high exposure to Thailand as one reason why it has posted a slight underperformance in the past six and 12 months. Yet over the past three years it has easily surpassed the index, with its share price returning 21.4% and net asset value (NAV) 22.7%, while the MSCI All Country Asia Pacific Excluding Japan index rose by 7.6%.

Dobbs thinks the recent sell-off in Asian equities markets has created attractive valuations. ‘Tapering has affected the sector, and the value available now is compensating for the risk,’ he said. ‘If you were to see much quicker tapering than expected, that would clearly be an issue [for Asian equities].’

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