After a number of rate hikes in 2018, real interest rates in Asia are now at their highest since 2009. Markets will likely remain volatile in the short term but outperformance is likely if the US takes a pause in rate hikes or recalibrates its balance sheet unwinding.
Trade talks between the US and China are a wildcard but a market rout and weakening data may nudge both parties towards a welcome deal - even if it is not a permanent fix.
December PMIs of Asian economies show manufacturing activity in China, South Korea, Taiwan, and Malaysia is currently in contractionary territory. Using GDP weights, Asia’s overall manufacturing activity is just a tad above the break-even mark.
If not for the Southeast Asian economies still in expansionary zone (save for Malaysia) the region’s manufacturing activity could already have slid into contraction. The last time the region’s PMI was in negative territory was during the 2015-16 trade recession.
In terms of actual trade numbers, over half of the economies in Asia (South Korea, Taiwan, Hong Kong, Philippines, Thailand, Singapore and Indonesia) saw a contraction in exports while exports in the rest (China, India, Malaysia and Vietnam) posted low single-digit growth rates.
All in, the data point to downside risks to GDP growth in Asia in the coming quarters - similar to that seen in 2015.