Asia’s Scarce Safety Stopgaps
At end-June Emerging Asia slightly outperformed the MSCI benchmark with a 5% loss lower than other regions, but all core and frontier markets were in the red. On the former index Indonesia and the Philippines dropped 20%; Korea, China “A” shares and Pakistan were off 10-15%; and India, Malaysia and Thailand fell 5-8%. On the latter Vietnam, Bangladesh and Sri Lanka had single-digit reversals, with Vietnam’s the least at 2%. On the main gauge only Turkey’s 30% plunge was worse, and of the fifty exchanges tracked in total, less than half a dozen had positive results.
According to fund data providers foreign investor outflows were heavy in May and June, although net equity inflows were $35 billion at mid-year. Allocation is a multiple of bonds for the first time in years with higher global interest rates, as portfolio managers target companies with earnings above economic growth that can also endure the region’s cascading trade and currency upsets with the US administration and dollar. However into the second half all sectors from consumer goods and financials to manufacturing and tech exports will stay under pressure, as geopolitics also weighs with Beijing-Washington confrontation and the unresolved Korean peninsula standoff.
China’s index and the renimbi stumbled to erase momentum from “A” share addition, as officials reported that just one out of almost 300 qualified foreign institutional investors put in money in June. The currency softened 3% against the dollar, with new export order contraction and the manufacturing PMI at 51.5 over the month. With international reserves steady at $3 trillion, analysts speculated that depreciation may supplement the bilateral tariff retaliation strategy, but offshore state and private corporate debt is also near $1 trillion and such a move hurts repayment capacity. Property developers that issued $100 billion in bonds from January-May are already under instruction to slow borrowing, and their shares have lagged the market for months. The government has enlisted seven agencies to combat price and sales “irregularities” as it tries again to damp industry “overstimulation.” Bank research increasingly describes an outright bubble, with values doubling the past two years in second and third-tier cities, and the clampdown is expected to reduce GDP growth to 6.5% or below in the second half.
Although the central bank urges stock market calm and rejects comparison to the 2015 scare, a leaked state think tank report warned of “financial panic” with leveraged funds back in force. Monetary policy pledges “prudent and reasonable” credit growth, as the reserve requirement was again cut to release $100 billion in liquidity nominally for debt-equity swaps and small business lending. Investors remain wary over bank health, with the state enterprise liability/asset ratio unchanged at 60% despite double-digit profit increases. The bear market infected neighboring Hong Kong “H” listings as well, and muddied Xiaomi’s much-touted IPO there at the end of the period. Taiwan also fell into the negative column on trade war high tech supply chain damage, as the President’s popularity continued to erode halfway through her term.
Indonesia was forced to raise benchmark rates to defend against rupiah weakness and capital outflow as President Jokowi began to gear up the reelection machinery with appeals to economic policy and religious moderates. India’s President Narendra Modi too prepared his extended bid as the rupee neared a record low 70/dollar with a rising oil import bill, and the central bank intervened with its hundreds of billions of dollars in available reserves. Although valuations dropped from lofty 20 times earnings levels, major family-owned companies are in debt restructurings under new insolvency procedures designed to clean up bank non-performing portfolios and high-level corruption around credit decisions, with success still elusive on both fronts. Korea enjoyed a bump with the launch of “reunification funds” before sentiment receded with renewed name calling by Pyongyang, and Thailand received international community support for its daring soccer team cave rescue which did not translate into equity buying. Pakistan after a first quarter bounce continued its drag into July’s national polls, with former Prime Minister Nawaz Sharif sentenced to a decade in prison for embezzlement. The country is trying to avoid the confinement of another IMF program, as Asia’s escape routes for shaken shares are set to narrow the rest of the year.