Asian stock markets’ jumbled journey judgments
Asian emerging equity market performance was mixed in 2016, as both core and frontier MSCI index components faded into end-year on combined internal growth and policy weaknesses, and external trade and geopolitical worries.
In the main markets China “A” shares and India were down 10% and 3% percent respectively, and Malaysia and the Philippines each lost 7%. Thailand was the winner up 23%, followed by Indonesia and Taiwan rising 15 % and Korea 7%, as the overall regional gain was just half the MSCI’s benchmark 8%.
In the frontier Pakistan, which will revert to the more advanced index in mid-2017, was the leading market generally with a 33% advance, and Bangladesh was also positive (+8%), while Sri Lanka and Vietnam declined 8%. JP Morgan’s EMBI bond gauge jumped 9.5% for the year, as Indonesia slightly outperformed (+11%), and the Philippines badly lagged (+3%).
Investors head into 2017 with this uneven record reflecting erosion of the region’s comparative “safe haven” reputation, which may be further tarnished if the new US administration carries through on commercial retaliation for alleged protectionism and currency manipulation. They still await decisive action on political, infrastructure, banking and private debt troubles, and favorites this year will be countries that finally treat them with a sense of urgency missing since the aftermath of financial crisis almost a decade ago.
Chinese GDP growth has tracked the 6.5% target with the PMI manufacturing reading well above 50, but the Yuan slipped by the same amount against the dollar for the biggest annual drop in two decades. Regulators reopened the initial public offering pipeline with dozens of new approvals, but tightened individual cash transfer reporting rules for transactions over RMB 50,000, from the previous RMB 200,000, at the same time they warned against an outbound direct investment deals surge.
According to government statistics, foreign ownership of local assets was RMB 3.3 trillion in the third quarter versus RMB 4.6 trillion at end-2015. Fund flow numbers compiled by the EPFR database continue to show heavy outflows from China as annual capital exit is estimate again in the $800 billion range, potentially pulling reserves below $3 trillion.
Coming into 2017, Beijing relaxed the 49 percent financial sector overseas participation cap and doubled the units in its managed currency basket to reduce dollar weight, but also revealed that bond defaults quadrupled as record liquidity was injected into the banking system in December to tamp yield spikes.
The central bank strengthened scrutiny of bank off-balance sheet exposure and also floated a possible real estate tax as Beijing mayor’s promised to “stamp out” price speculation. Outside these erratic indicators, China’s Communist leadership entered into a diplomatic spat with US President-elect Trump over Washington-Taiwan ties ahead of the upcoming party Congress, where President Xi may seek another term and groom next-generation successors.
India sputtered the final months of 2016, as equity inflows fell to US$4 billion and US$6 billion in debt outflows were registered with the controversial seizure of high-denomination banknotes to isolate so-called black money. The sudden move designed to defeat wealthy tax-dodgers descended into chaos which overwhelmed ATM networks and shuttered small shops, and also delayed the national unified tax timetable as states grappled with the revenue fallout. Prime Minister Modi’s team suggested that further anti-corruption and money-laundering measures were being planned that could also have immediate personal consumption and bank liquidity effects. The saga overwhelmed lower inflation results allowing a minimal benchmark rate cut, as growth estimates were rejiggered for further distance from the 7% goal.
Indonesia was popular with a series of deregulation and infrastructure packages, but a hyped tax amnesty lagged projections to help send the fiscal deficit toward the 3% of GDP limit. Foreign investors, who hold one-third of domestic government debt, were further disturbed by official action against securities house JP Morgan, including its suspension as a primary dealer, after its research recommended trimming allocation.
Thailand bounced off its 2015 bottom as a constitutional election return roadmap was approved under the ruling military, which also ushered in smooth royal succession after King Bhumipol’s death. The Philippines had the most extreme swings after President Duterte’s post-election rally gave way to concerns over unpredictable law and order and economic policies, resulting in the peso as the currency laggard and also a regional wake-up call to offer reasoned convincing solutions to festering poverty and security challenges alongside the lengthy productivity improvement, financial stability and structural reform agenda.