ASEAN is the Association of Southeast Asian States. It’s comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

While ASEAN has spent the last few years becoming more economically connected to China, that correlation has weakened sharply this year putting ASEAN in a good position to continue growing despite the slowdown in China, according to the Chief of Asia Pacific at ANZ Research, Glenn Maguire.

ASEAN crisis

Before the recent crisis, ASEAN was more sensitive to changing demand among G3 nations (the U.S., Europe and Japan). Asian economies have historically been more strongly correlated during downturns than upswings, and the last few years have been no exception. The industrial production correlation between China and ASEAN that shot up in 2008 started to drop again in 2011 and is now negatively correlated. The correlation between exports remains in place, but it is expected to follow suit and start dropping again in the near future.

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China ASEAN correlation

ASEAN switching gears due to growth in demand

ASEAN has been able to switch gears because of growing demand outside China, primarily Japan and the U.S.  “The ASEAN economies are vertically integrated into the Japan supply chain and will benefit directly from improved Japanese final demand; and indirectly from US consumer and housing recoveries via a pick-up in Japanese autos and consumer product exports to the US,” writes Maguire.

This doesn’t mean that ASEAN economies are bound to rise—the G3 correlation entails its own risks. If Japan and the U.S. continue growing as they have for the last few quarters then ASEAN countries will get a boost from that increase in demand, but there are still plenty of bears who think U.S. markets in particular are overbought. If U.S. markets grow too rapidly, there is the possibility that investors will pull out of emerging markets in favor of the S&P 500 (INDEXSP:.INX) or other assets.

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ANZ concerned about disorderly repatriation of capital

ANZ Research had been specifically concerned about the possibility that ‘disorderly repatriation’ of capital out of emerging markets to developed economies could wreak havoc on ASEAN nations, but Maguire notes that the “policy response appears to be falling into place which will mitigate the size of the downside risk.” That doesn’t mean capital flight won’t happen, but governments are putting policies in place that will give them time to adapt to changing economic conditions.