Investors overlook Asia’s outsourcing, consumer debt risk

Investors overlook Asia’s outsourcing, consumer debt risk

Hong Kong: Investors are overlooking the growing risk in Asian markets from rising outsourcing and consumer debt, Citigroup Inc. analysts said.

Outsourcing of manufacturing by companies in the US, Europe and Japan to emerging economies in Asia makes the region “more sensitive" to a slowdown in global demand than at any time in the past 15 years, Citigroup analysts said in an 12 August research note. Demand may be hurt if central banks raise interest rates, the analysts said.

Consumer debt is also rising, the analysts said, with domestic credit in six of 10 Asian countries equal to more than the value of gross domestic product.

China, South Korea and India registered the fastest growth in consumer debt since 1995, according to the report.

“If these concerns regarding credit quality persist, it would be heroic to believe that the consumer would be willing to take up more debt for consumption or that the loan providers would be willing to extend the loans," the analysts said.

In 2006, domestic credit was at 99% of the $13.4 trillion (Rs542.7 trillion) US economy. In China, it has risen to 138% from 84% in 1995. Korea’s jumped to 107% from 54% while India rose to 64% from 44%, according to the report. The level for the euro area is 153%.

While consumer debt is increasing, companies are borrowing less, with net debt-to-equity levels at 23.3%, a 26-year low, the analysts said.

“One of the side effects" of outsourcing has been a rise in the operating leverage of companies as fixed costs increase, according to the Citigroup report.

If global economic growth is lower than forecast, high operating leverage will work against investors, the report said. Operating leverage is the ratio that compares fixed to variable costs.

Small changes in sales have a “disproportionate effect" on the earnings of companies with high operating leverage, the Citigroup analysts said.

South Korea is the market with the highest operating leverage in Asia outside of Japan, at 2.2 times, followed by Taiwan at 1.9 times and Thailand at 1.7 times, they said.