China’s weekend credit easing – the central bank reduced the amount of cash
that banks must hold as reserves, in effect injecting about Rmb400bn ($63bn)
into the economy – did not excite investors.

Maybe they have been too depressed by a series of wobbly data across the
region to be cheered by a single move. Or perhaps the meek response is
better seen as the slow factoring in, intentionally or otherwise, of a
maturing economy.

Huge shift

This would be a huge shift. Asia’s markets (ex-Japan) have been the territory
of growth-seekers. Growth-focused managers hold more that 80 per cent of
funds in the region, compared with two-thirds in the US and less than half
in Europe, says Citigroup. Just 2 per cent consider themselves income funds,
compared with 17 per cent in Europe. Yet since the US lost its triple A
rating last summer, stocks in still-growing Asia have underperformed those
in austerity-stricken Europe. Why?

Three factors point to the long-term shift in growth: greater credit
sensitivity, slowing productivity gains and stickier inflation, according to
HSBC. Credit has expanded faster than gross domestic product since 2007,
reaching levels last seen just before the Asian financial crisis.

Modest returns

Productivity gains, meanwhile, are clearly slowing. While more mature
economies can cope with more debt, credit-driven expansions are less robust
than the efficiency improvements the region is used to. On top of that,
inflation gets stickier as the focus shifts to domestically focused service
industries, where inflation, relative to growth, is harder to control than
in easily upscaled manufacturing. Cue fewer rate cuts than growth-hungry
investors are used to.

Investors’ frustrations are clear. Asian stocks, relative to earnings, are
further below their long-run averages than in Europe or the US. Weakness in
those two regions is partially responsible. But Asia must consider its own
trends: deeper, more mature economies are more stable, but they also offer
more modest returns.

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