The expectations of China’s growth rebalancing away from industrial and real-estate investment toward consumption (of both goods and services) has defined several medium-term trends in relative asset prices within Asia. We highlight three examples.
Equities: Industrial stocks have broadly underperformed consumer stocks in Asia since 2008 and more recently since mid-2015. There has been some variation between consumer staples and discretionary stocks, reflecting cyclical expectations of the Asian consumer (with discretionary underperforming staples during downturns), but the structural trend of optimism for consumer stocks over industrials is clear.
FX: There has been a broad trend of currency underperformance of industrial commodity and capital exporters within the region. This has been most evident for AUD/NZD, which has captured the theme of China rebalancing away from investment toward consumption, with New Zealand benefiting from its dairy exposure to China. But more generally as well, commodity-exposed currencies such as IDR have underperformed the consumer goods/services exporters such as SGD over the long term.
Commodities: While commodity prices have broadly fallen, this masks considerable divergences. In particular, metals such as zinc and aluminum that are widely used in consumer products such as cars have materially outperformed those more directly tied to capex, for instance iron ore and coal.
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Market implications: Sell NZD vs Asia-Pacific peers.
While the longer-term trend of rebalancing is inexorable, especially given this is a priority for China, the recent “risk-on” sentiment driven by a dovish Fed and stable China FX suggests some of the risk premium priced into “investment assets” vs “consumption assets” could unwind, at least temporarily.
This has already transpired to some extent, with AUD/NZD trading close to year-to-date highs. But with the RBNZ willing to ease further, dairy export prices remaining wea and some cyclical releveraging in China likely in the near term, we believe the NZD will broadly underperform its Asia-Pacific peers over the coming months.