How globally interlinked are the Asian economies with the advanced economies? To answer this question we take a look at the correlations of the quarterly year-on-year growth of the industrial output of several regional countries.
We find that three correlation pairs stand out as shown in the charts below: 1. Malaysia's IPI is fairly well correlated to Japan's IPI over the 2005-1Q2013 period . 2. China's IPI is also well correlated to Korea's for the 2008-1Q2013 period. 3. The industrial output of Korea and the US has a R Square correlation of 66% over the 2005-1Q2013 period.
Looking at the summary table below, it appears that Malaysia is the most exposed to the global economy given its high 95% export/GDP ratio, which has actually come down from 113% back in 2005. Malaysia also has a low historical growth of 3% for the IPI compared to China (14.3%) and Korea (5.7%).
So as a global investor, which country would you avoid and which country would you feel safe investing in? Just based on the charts alone, the brighter outlook for US manufacturing in the years ahead (due to the cheaper gas theme) is likely to benefit South Korea given the correlations between the two countries' IPI. Does this mean that more US manufacturers, who may go either further upstream or downstream depending on the shape of new technologies, will outsource their semiconductor chip components to Korea? The details of the linkages need to be explored further.
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