Asia set for outperformance; India to benefit from strong balance sheets, supply-side reforms: Morgan Stanley

Morgan Stanley (File pic)

The stress in the banking systems in the US and Europe has made the case for Asia’s outperformance even more compelling amid tailwinds like China’s reopening and healthy growth metrics in India, Morgan Stanley has said.

In a recent report, the financial services major said the aggressive monetary tightening cycle in the US and Europe is being exacerbated by contracting liquidity conditions at both small and large banks.

“...US bank loans are growing at 10%Y (credit, which includes securities, is growing at 2.7%Y), but deposits are growing at   -5%Y. This gap between credit and deposit growth is even more pronounced for small banks (defined by the Fed as banks outside of the 25 largest banks by assets), where credit to deposit ratios have risen faster than at large banks,” it noted.

The most aggressive monetary tightening cycle in the US and the Euro area for the past three cycles is already weighing on growth momentum, it added.

While this will spill over to Asia in the form of the external demand recovery being constrained, Morgan Stanley thinks that Asian countries will still be able to generate sufficient domestic demand alpha to continue to allow growth differentials to shift in favour of Asia.

“By 4Q23, we expect Asia's growth to be 500bps higher than DM growth – the strongest since 2017,” the report said.

Morgan Stanley has listed three factors driving Asia’s outperformance.

First, interest rates didn’t rise as much into restrictive territory in Asia.

“While DM (developed markets) central banks had to raise interest rates at their most aggressive pace in recent times to combat inflation, the rate-hike cycle in Asia was more subdued.

"Policy rates have risen by 475bps in the US, 350bps in the Euro area and, by contrast, just 100bps in Asia. This means that the sacrifice in domestic demand should be much smaller in Asia,” it said out. One basis point (bp) is one-hundredth of a percentage point.

Second, China’s reopening should lift its economy and generate positive spillovers for the rest of the region.

“The economic rebound is not limited to reopening gains, as policymakers have now adopted a pro-growth stance. We view the rapid reflation in the property market, with secondary sales now approaching 2021 levels, as a sign of consumer confidence rebounding strongly,” Morgan Stanley said.

And third, Asia’s other three large economies (on PPP weights) – Japan, India and Indonesia – all have economy-specific factors driving domestic demand.

Regarding India, it said balance sheets for the financial and non-financial private sector have been cleaned up over the years, so the private sector is primed with a healthy risk appetite for expansion.

“Supply-side reforms are enabling India to gain market share in global goods and services exports, thus catalysing employment and investment,” it said.

Services trade surplus has been growing steadily even as its goods trade deficit has widened. Pickup in services exports has provided an important offset to higher oil imports, Morgan Stanley said.

Besides, credit growth in India is near multiyear highs, while PMIs too are holding at strong levels.

However, the report added that if the US enters a deep recession (ie GDP contracts by a percent or more), Asia would not be able to escape this downdraft. Just as in 2007-8, Asia would then likely recouple on the downside, at least during the worst point of the shock.

“However, as in 2010-11, Asia would probably be able to emerge quicker once financial conditions stabilise,” it said.