Most Asian economies remain sluggish as 2015 closes

Investment has been weak across Asia.

It has been noted that in general, most Asian economies are still sluggish as the end of 2015 approaches.

According to a research note from UBS, exports are contracting in nominal USD terms and are close to zero on a volume basis. Investment is weak across the region with signs of excess capacity and retail sales are decelerating in most economies.

Hence, top line growth isn't helping profits much, the report said. However, it also asked, what about next year?

The report said it expects Asia-ex Japan to grow 5.1% in 2016 versus an estimated 5.3% this year; whereas consensus forecasts growth to improve to 5.6% next year. Debt overhang should restrain exports and domestic demand for the region.

The global trade cycle is mainly a function of the global credit cycle, whereas the domestic demand cycle is primarily about property and construction funded with domestic leverage. A return to robust exports would require a strong acceleration in private sector leverage in the US, Europe and China, which is highly unlikely.

Here's more from UBS:

Meanwhile, stronger Asian consumption and investment depend on credit growth re-accelerating in much of the region at a time when domestic debt has increased sharply for years and many industries appear bloated with excess capacity.

In general, we think most Asian central banks will cut rates further next year coupled with a 100bps increase in the US policy rate UBS expects. The degree to which rates will be cut are a function of local inflation expectations, reliance on foreign funding, the degree of capital account openness, and how much US rates rise.

We expect inflation to accelerate in 2016, as the impact of collapsing oil fades, and then decelerate in 2017. However, Asian central banks will likely focus on the underlying disinflationary pressures associated with debt overhang or excess industrial capacity in much of the region.

This should result in Asian currencies weakening against the US dollar, and as we saw in 2015, central banks will feel compelled to intervene in exchange rate markets to manage depreciations. However, currency intervention makes it more difficult for domestic monetary easing to gain traction and will probably result in the same sort of financial grind witnessed in 2015.

We expect fiscal policy to remain modestly supportive across the region. It is tempting to expect Asian policymakers to deploy large scale fiscal stimulus, in light of persistently weak growth and the challenges of lowering rates in the face of rising US rates.

However, this hasn't happened to date and we doubt it will next year. Budgetary policy is constrained in Japan, India, Malaysia and Indonesia by a combination of government debt, government deficits, current account deficits or fiscal rules. Other economies have more room to maneuver, but government announcements do not suggest a significant shift to aggressive fiscal stimulus for 2016 so far.