Deutsche Bank Research published an investment report today titled “Five Asia Themes for the Rest of the Year.” In the report, DB Chief Economist Taimur Baig, Ph.D lays out his view of the key issues to watch in Asian markets over the next three quarters. He highlights the likelihood of both reforms and continued growth in China, elections in India and Indonesia, Asian debt levels, structural factors impacting commodity producers and increases in non-commodity exports as the major themes for Asia in the rest of 2014.

Asia

Growth and reform in China

Taib takes a bullish view on China, arguing we will soon see a rise in both exports and public sector spending, and pointing out the country still enjoys strong power production and freight traffic, low levels of central government debt and a strong international reserve position. He also highlights the coherent policies for reform outlined in the latest Plenum and NPC, and says they are likely to be enacted over the next year or two.

Furthermore, according to Taib, the Chinese government is up to the task of managing the nation’s complex economy. “We are also convinced that the Chinese authorities have the capacity to manage financial sector and governance related risks without creating panic or dysfunction.”

Elections in India and Indonesia

Taib argues that all the talk about new politicians leading to meaningful economic reform in India and Indonesia will prove to be smoke and mirrors. “We are however not going to get carried away in this wave of optimism. Election cycles have come and gone in both countries over the past decade or two, with the markets rallying exuberantly in the lead-up or aftermath of decisive electoral results. These rallies have almost inevitably fizzled though as the reality of running a large, complex, and noisy democracy set in.”

Rising debt levels in Asia

The DB report also discusses the topic of rising levels of debt in other countries in Asia besides China. Taib agrees that personal debt levels in countries such as Malaysia, South Korea and Singapore are increasing relatively rapidly. “Malaysia, Singapore, South Korea, and Thailand have households with debt/GDP ratio over 70%. The fear is as rates rise, these households will struggle with their debt service obligations, which will constitute a major constraint to consumption spending.”

Taib argues, however, that most of this increase in consumer debt is not that worrisome given the economies of the countries involved. “Households have substantial gross assets in Singapore and Korea, and therefore their net asset positions are not particularly worrisome. Both countries also have prudent fiscal policy in place, which means if need be, the authorities can step in with supportive measures without stretching public finances.”

Structural factors to impact commodity producers

The report advances the case that many Asian commodity producers will come to realize that structural factors, not cyclical factors, are limiting export earnings. Taib says this particularly applies to Indonesia and Malaysia, as the U.S. shale gas boom and China’s emphasis on clean growth is likely to keep Asian energy commodities weak for some time.

Non-commodity exports to strengthen

Taib also expects Asia’s electronics and non-electronics manufactured goods exporters to see business pick up over the next few quarters as the global economy stabilizes. “While much focus has been devoted to the upside to the US, equally important for Asia is the fact that the euro area is coming out of recession this year. A combined pull from its two largest trading partners offers a major cyclical boost for Asia’s economies this year.”