The US Federal Reserve has been pumping money into the financial system at terminal velocity in a desperate bid to boost the economy. The various bouts of quantitative easing in the US, the latest of which is seen in ‘quantitative easing 2’ (QE2), comprising US$600 billion of stimulus money, has ignited worries about the side effects of the formation of asset bubbles in Asia—as seen in the rise of price inflation in stock markets and residential properties.
Our Asia-centric view is that the big issue is not about QE2 or asset bubbles. The almost one-way flow of liquidity to Asia reflects a fundamental shift in the allocation of global fund managers’ portfolios.
Even before QE2 talks the inflows into Asia and emerging markets had picked up speed. Three percent of US pension funds are invested in Asia while this region makes up 30% of nominal global GDP. So there is massive underinvestment in the region and hence room for further growth and little risk of overheating.
The term asset bubble implies an anomaly, and it gives the impression that things could ‘pop’ any time. We think otherwise. The shift of wealth to Asia will continue to build over the next decade, and in the long run the region has the capacity to absorb all the liquidity coming its way.
Look around the globe and it’s clear that Asia is where investors should be putting their money. However, regulators are understandably cautious about absorbing too much liquidity all at once, and are taking appropriate steps to temper the flows to a more manageable pace.
The shift of relative value to Asia versus the rest of the world will continue, and Asian regulators need to manage that process wisely, which is what they have been doing to the right degree.