Asian Stocks’ Safety Scramble Scrum
With the negative MSCI showing across all Asian core and frontier stock markets, fund managers began the second half constructing narratives around selected countries’ relative trade and currency war evasion and upbeat economic and financial system health as preferred spots. Specific company size and industries were also promoted, with India on a recent run with embrace of high-tech stalwarts like Tata Consultancy Services and less-followed e-commerce listings without lofty double-digit valuations. Indonesia has enjoyed a foreign investor revival of debt and equity inflows with its domestic consumption-led story, tighter monetary policy, and diminished populist and religious fundamentalist concerns in elections.
Vietnam is coming off economic and share overheating according to the International Monetary Fund’s July Article IV report, and will be a main beneficiary of any successor Trans-Pacific Partnership free trade pact concluded without the US, in the view of think tanks like the Washington-based Institute for International Economics. Kazakhstan as a dual Eurasian destination, and a rare frontier gainer up 3% through mid-year, is likewise on the radar after the s launch of the Astana International Financial Center lured dozens of offshore banks and securities houses ahead of planned state company offerings. These picks carry momentum into the third quarter, but underlying financial sector and structural reform disappointment could still stifle it as investors again rotate toward more familiar and liquid locations.
Indonesia’s central bank abandoned its neutral stance, and raised the benchmark rate 100 basis points in consecutive meetings to 5.25% to stem heavy capital outflows in May. It also bought local bonds in secondary markets as yields neared 8%, and intervened from the $125 billion reserve stockpile to support the rupiah as it softened 5% against the dollar. With the moves the growth and current account deficit forecasts stayed respectively at 5% and 2% of gross domestic product. Officials announced measures to stimulate the property market by relaxing the minimum 15% down payment for first time home owners and expanding available credit. Standard and Poor’s Ratings predicted activity would remain flat, but acknowledged potential supplier benefits. On trade Jakarta dispatched a delegation to Washington, which ran a bilateral $13 billion deficit in 2017, to address the threat of duty-preference removal raised by the Trump Administration in April. Garments and rubber are chief targets following a US Trade Representative review which placed Indonesia on a dozen country “priority watch list.” To maintain international payments balance, Finance Minister Sri Mulyani Indrawati proposed possible equipment import limits for infrastructure projects that may be finalized soon.
The central bank reintroduced short-term 9 and 12-month government paper to diversify foreign investor options as overseas debt hit $360 billion in May, evenly split between official and private. The latter is concentrated in mining, manufacturing and electricity company borrowers, and the debt-GDP ratio is 35%, but over 85% is long term. However Asian high-yield bond rates have gone from 6% to 9% in recent months on leverage worries among Indonesian and Chinese names in particular. Against this background leading Bank Mandiri, despite a 30% first half profit jump, may confront resistance as it seeks $500 million in overseas lines in the near future according to its chief executive.
Indonesia’s credit default swaps spiked to 175 basis points over US Treasuries before settling down and the non-resident local bond share is still almost 40%. Regional elections at end-June were inconclusive as a signal to 2019’s presidential contest, but the incumbent Joko Widodo will likely face a close race as voter sentiment veered away from establishment candidates and family dynasties. Nonetheless former President Suharto’s son Tommy plans to form a new party and enter the competition on a nominal anti-corruption platform.
Vietnam is on track for better 6.5% growth with impetus from the Trans-Pacific and EU free trade agreements, on inflation within the 4% target. However fiscal consolidation must go further to keep public debt within the 65% of GDP legal cap, and credit expansion above 15% is too fast, the IMF survey argues. State-owned banks continue in trouble with low capital and earnings, and bad loan resolution through the central asset management agency can be accelerated. Longer range capital market development, particularly corporate bonds to balance with equities, is also lacking and may damp quarterly enthusiasm, the review cautions.
