Asia’s Stock Sprint Wheeze
Emerging Asia outperformed both the core Morgan Stanley Capital International gauge and other regions in the first quarter with an 11% jump, mainly due to the 30% surge in China “A” shares, the best result in five years. All other components were in the mid to high-single digit range, with Malaysia the sole loser with a less than 1% decline. India and Indonesia averaged a 5% gain as investors awaited the outcome of April national elections, while Thailand was up 6.5% as party haggling may persist over the next government’s formation, with the military again set to dominate through surprising voter support. Vietnam (+13%) led frontier markets, on actual and perceived trade diversion there from the deep US-China tiff, while Bangladesh (+7%) survived an Islamic bank failure and Sri Lanka was barely positive with its International Monetary Fund program extended another year.
Pakistan (+7.5) may rejoin the frontier list informally as it negotiates another Fund arrangement following Chinese and Gulf credits, with possible temporary capital controls to hoard foreign reserves. The China share bump, including 18% in the basic also Hong Kong-listed category, can be attributed to higher stock and bond index weightings, early year currency and growth stabilization, and a pause in export and foreign direct investment disputes with Western partners, but underpinnings are shaky. The Asian Development Bank before its dashed annual meeting, which underscored the extent of commercial and diplomatic hostilities with Venezuela as a test case as Washington pressed for Guidu opposition participation, slashed regional gross-domestic product expansion to 5.8% this year. It cited global trade policy uncertainty as the World Trade Organization predicted just 3% increased volume, and “sharper slowdown” in China and other major countries as overriding risks.
The National People’s Congress reiterated the 6-6.5% growth target, as the official purchasing manager index topped the neutral 50 mark in March, despite export orders down for the tenth month in a row. In January and February industrial output and retail sales rose 5% and 8% respectively, while mobile phone and car purchases plunged 15%. Fixed asset investment as the longstanding driver was up just over 5%, and unemployment reached that same level for a 2-year peak. The Yuan strengthened 2% against the dollar over the quarter, as analysts now believe the previous presumed drop to 7 is unlikely, especially if a currency understanding features in an eventual Trump Administration tariff deal. The central bank reported reserves at a six-month $3.1 trillion high in February, and affirmed a “bigger market role” in exchange rate determination. Of the $20 billion in foreign stock market inflows the first two months, $17 billion came through the Hong Kong Connect, and MSCI expects the pace to continue with an $80 billion “A” share allocation by year-end.
However at the party gathering Premier Li revealed that three-quarter of provinces lowered growth goals, as the CASS think tank estimated that broad public debt from the central and local governments and state enterprises approached 150% of GDP. The separate private sector Beige Book found that first quarter corporate borrowing was the steepest since 2013, and called bank deleveraging claims “laughable.” Former central bank head Zhou, who held the post until the 2008 financial crisis, warned that excess debt lessons from Japan’s lost decades have not been absorbed. Total social credit, including from shadow sources is still advancing at a 10% annual clip, as onshore and offshore bond defaults begin to spread to also hurt equity values.
India’s 7% climb lagged the MSCI benchmark’s 9.5% before the mid-April election kickoff, and the ruling BJP party coalition may not win a majority according to early readings. The ADB kept growth above 7% this year, as the central bank downgraded the 1919-20 forecast slightly to 7.2%. Consumer price inflation was 2.5% in February, allowing a 25 basis point interest rate cut before the polls. The rupee mirrored the renimbi with a 2% first quarter uptick versus the dollar, with the current account deficit hovering at 2.5% of GDP. Fitch maintained its lowest investment-grade sovereign rating, but urged fiscal consolidation, bank cleanup and faster structural reform in a presumed second Modi term. That lasting formula is in order for the Asian equity rally to continue, in contrast to the confidence flickers to date.
