Asia’s Shrill PMI SOS
Asian stocks and bonds were battered in July, with the Philippines alone positive for equities and the Korean won the sole currency gainer against the dollar, as PMIs for major economies hit post-crisis lows well under 50. Dedicated debt funds experienced heavy outflows with foreign ownership of local government paper off around $15 billion led by a 10 percent decline in Malaysia to 40 percent of the total as Indonesia also pared back to 30 percent. Auctions failed in India and Thailand awaiting a new central bank head in the former and passage of an infrastructure project law in the latter complicated by political amnesty provisions, as the region was likewise snagged by China’s liquidity squeeze and capital flight over the period after crackdowns on wealth management products and fake trade documents. Malaysia’s exit must be absorbed by domestic institutional investors previously unimpressed by 3.5 percent yields, as the halved current account surplus at 2 percent of GDP feeds ringgit weakness. The re-elected prime minister’s ruling party won an important provincial contest but pro-Malay economic preferences and commodity subsidies embedding a structural fiscal gap remain in place. Islamic finance action has increasingly been diverted to the Gulf and North Africa, as sukuks are treated as a safe have and transition Arab states adopt new internal and cross-border issuance regimes. Chinese officials trying to slow monetary growth to the 12 percent target have sent borrowers to the Hong Kong syndicated loan market with other outlets closed as corporate leverage has more than doubled the past five years to 125 percent of output on lower profitability. The latest macro statistics restore fixed investment over consumption as the main driver, helping to further propel commercial and residential property prices despite overcapacity in numerous industries. India’s planning chief Rajan, a well-known academic and author who served at the IMF, will assume the central bank post amid confusing signals over rupee defense and bank bad asset treatment which brought a 25 percent overseas selloff of government debt leaving holdings further under quota at $30 billion. Benchmark interest rates stayed in place as gold import and interbank restrictions were announced, as the parliament entered the final pre-election session with 49 percent insurance and pension sector opening swamped by dozens of other bills awaiting action and a breakaway push to create more states with their companion appropriations.
Despite partial fuel subsidy adjustment and good FDI figures, Indonesia seems stuck in presidential succession mode as the rupiah hovers around the sensitive 10000 to the dollar line and GDP growth flags to under 6 percent. The Bumi Resources fight in London and Jakarta shines a spotlight on poor corporate governance and potential default and a successful external bond placement failed to sway sentiment. Korean bonds have not suffered as much as foreign-dominated stocks with the MSCI Index down 10 percent as Samsung lost a US phone patent dispute with Apple on static-filled connections.
