Dear Paul,

I keep reading that there may be a slowdown in the U.S. economy. How will that affect Asia? I know you believe “there is always a bull market somewhere in the world” but if the U.S. economy slows down, won’t that hurt Asia?

THE U.S. ECONOMY IS STILL GROWING!

First, note that the U.S. economy is doing quite well. While it is not growing as fast as it was in 2003, it is still growing. Barring some international geo-political crisis, the U.S. economy and the U.S. stock market should continue to make gains over the next three years.

But to answer your question, how would a U.S. economic downturn affect Asia?  The answer is that the continuing rise in Asian domestic demand, more diversification in exports, and a looser monetary policy give Asia some armor against any future U.S slowdown.

Asia’s buoyant economies are becoming less sensitive to U.S. economic swings since China and India started to emerge as global titans, Japan’s prolonged recovery, and growing intra-regional trade.

Most economists now believe the success of Asia’s economies is less closely linked to the fortunes of the U.S. than a decade ago.  In a recent issue of BUSINESS WEEK, Chang In Whan, chief executive of fund manager KTB Asset Management in Seoul, South Korea, said, "in the past we had a situation where Asia got pneumonia if the U.S. had a cold. No more. The U.S. will still remain a trendsetter, but Asia and Europe will hum along by themselves unless we have a disastrous recession in the U.S."

In that same issue of BUSINESS WEEK, Peter Morgan, chief economist for the Asia-Pacific region at HSBC Bank in Hong Kong identified three important factors. First, Asia’s exports are less dependent on U.S. consumers than they used to be. Second, Europe and emerging markets in other regions such as Latin America and the Middle East have emerged as important export destinations. Third, factoring in the growing demand from Asian consumers and you see a clear picture of why the region should be less reliant on the U.S. than it used to be.

JAPAN AND THE REST OF ASIA

 Those factors hold true across much of the region. In Japan, Asia’s biggest economy, economists believe that for Japanese companies, Asia and Europe will offset any falls in demand in the U.S. Currently, exports to the U.S. are down on a year-on-year basis, and shipments are rising to Europe and other markets. China last year overtook the U.S. as  Japan’s largest trading partner.

Korea is also benefiting from a more diversified export base. While the U.S. remains a  large market for companies like Hyundai Motor and Samsung Electronics, the U.S. share of Korean exports is 15% compared to China’s 22% and to 52% for Asia as a whole. In the 1990s the world had relied almost solely on the U.S. as the one engine for growth but now there are multiple engines, especially other Asian economies.

GLOBAL INVESTING & GLOBAL DIVERSIFICATION LIMIT INVESTMENT RISK

This is why FOXHALL CAPITAL believes “there is always a bull market somewhere in the world.” We also believe in the FOXHALL CAPITAL INVESTMENT STRATEGY that a .globally diversified investment portfolio provides a “more diversified’ and therefore safer asset allocation than investing only in the U.S. stock market.”

Until next week….

-Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053