Asia’s Equity Faultline Rumblings
Asian emerging equity markets were down 7% compared with the 9% overall decline on the MSCI core Index through September, as Europe, Latin America and the companion frontier gauge fell further. Only Taiwan was positive with a 2% bump, although India, Malaysia and Thailand were close with barely negative readings. China “A” shares, Indonesia, Korea, Pakistan and the Philippines lagged with 10-20% losses, and Bangladesh also dropped double digits on the frontier gauge. The twin benchmarks had few winners, and Argentina and Turkey as crisis epicenters during the period were at the bottom with 50% selloffs.
According to fund trackers like EPFR and the Institute for International Finance, chronic foreign investor outflows, often fueled by ETFs which are one-quarter of the total, brought net allocation below $20 billion year to date, less than half 2017’s sum. Local bond market performance mirrored stocks, even though mutual fund commitments to the debt asset class were higher. Asian currencies slid against the dollar, while the International Monetary Fund maintained the regional economic growth forecast at 6% through 2019 despite festering trade and financial imbroglios with the US. Toward quarter-end money managers were particularly wary of current account deficits in India, Indonesia and the Philippines and possible domestic and overseas private debt overhangs that government fiscal and monetary tools may not readily overcome.
China’s official purchasing managers’ index was just over 50 in September, with export orders at a 2-year low as so-called Phase III tariffs on almost all US shipments are set. The move on its own would cut gross domestic product growth 1%, but JP Morgan predicts offsetting currency depreciation and project and credit stimulus as a complete counter. The Yuan depreciated 4% versus the dollar over the quarter for a 9% six-month slide. Its share of global foreign exchange reserves remains small at 2% according to the IMF, and the central bank pledged future rate increases roughly in line with the US Federal Reserve to prevent misalignment. The People’s Bank signed a memorandum with the Hong Kong Monetary Authority to better drain offshore liquidity, but Moody’s Ratings does not anticipate large-scale intervention.
The rater has a stable banking sector outlook for the coming year under a baseline 6-6.5% growth scenario, as it prepares for further international competition under recent opening gambits to quell Brussels’ and Washington’s access anger. However the Finance Ministry revealed local government debt outstanding in August at $2.5 trillion, approaching one-fifth of GDP, and Beijing reportedly directed state media to downplay risks from this exposure. The household debt/output ratio in turn soared to 50% in 2017, global insurer Allianz calculated. The central and provincial governments plan to issue RMB 750 billion in special infrastructure project bonds to fight export drag, which will add to the load that a new nationwide system is designed to track. Against this backdrop, domestic investors who account for 85% of trading have proven more skittish than foreign counterparts preferring to buy through the Hong Kong Stock Connects to Shanghai and Shenzhen. With the debt-trade blowups neither category was swayed by the news that the rival major FTSE index will increase its mainland share weighting to 5% in incremental stages through end-decade.
India and Indonesia were trouble spots as currencies reached record lows against the dollar with energy-driven external payments imbalances, and authorities responded with rate hikes and import curbs. Presidential incumbents, Narendra Modi and Joko Widodo, head into elections next year with respective 8% and 5% growth, but doubts about investor-friendly policies despite a raft of nominal liberalization and streamlining measures. Indian company earnings continued to advance at an over 10% annual clip to support high valuations, but property and financial industry intertwined woes were illustrated by a major non-bank lender debt default which punctured bullish sentiment. The government sent mixed signals in partially removing restrictions on overseas participation in local and rupee-denominated bonds abroad, while at the same time cracking down on tax and operating advantages of expatriate Indian fund vehicles. Jakarta will review public investment spending with the intent of shifting ownership and management to the private sector, while pressuring international hydrocarbons operators to keep business at home with state giant Pertamina. Along with resolving conflicting approaches, it must also handle natural disasters nearby the Bali IMF-World Bank meetings to magnify investor anxiety.