Emerging Asia market triumph may prove fleeting
Core emerging-Asia stock markets outperformed European and Latin America counterparts in 2017 with an overall 40% gain, above the 35% advance of the benchmark MSCI index, with Pakistan’s stock market the sole loser with a drop of more than 25%.
China “A” shares, jumping almost 50% as they prepare for a larger weighting on the MSCI, were the main turnaround story and driver, followed closely by South Korea’s 45%, shaking off the North’s bellicosity to herald the new Moon Jae-in administration’s cleanup of chaebol and consumer debt. India was next at 35%, ahead of ASEAN markets, where Thailand led (+30%) and Indonesia, Malaysia and the Philippines finished in the 20-25% range.
Among frontier exchanges, Vietnam’s 60% surge was more than double that of the index, while Sri Lanka was flat and Bangladesh rose 15%.
The universal upswing was supported by headline growth in gross domestic product, earnings exceeding expectations, and positive trade and capital flows overcoming gloom from US and other Western government protectionist sentiment and incremental monetary tightening.
China concerns weigh on outlook
However, on entering 2018, banking and foreign-investment clashes in regional linchpin China again weighed on the outlook, while fund managers positioning for more selective returns began to dissect neighbors’ underlying economic and financial-system diversification and overhauls in view of political and practical limitations.
China’s December official manufacturing Purchasing Managers’ Index (PMI) was over 51, but masked a meager 5% rise in private fixed-asset investment, a one-year low.
Both the local and offshore yuan were up 7% against the US dollar in 2017, but the State Administration of Foreign Exchange (SAFE) started the new year with stricter individual bank-card holder caps on domestic and overseas dollar withdrawals, with the latter set at US$15,000 annually.
The National Development and Reform Commission in turn issued a directive mandating online registration of all cross-border deals above $300 million, and requiring approval for “sensitive” media and defense-related transactions regardless of size.
China’s capital-exit crackdown was coupled with foreign-investor overtures, including temporary tax exemption for “favored” sector allocations such as in mining and technology in response to US President Donald Trump’s global corporate tax cut.
The Chinese Commerce Ministry promised to speed financial-services opening after a bilateral summit agreement, but the banking regulator still will not allow international ownership of domestic units over 20% for a single shareholder and 25% generally. Washington signaled its disappointment with access by refusing the proposed Ant Financial takeover of MoneyGram on reciprocity and national-security grounds, as the Treasury Department’s Committee on Foreign Investment in the United States flagged account piracy and cyber-espionage potential.
The Central Economic Work Conference met to endorse the “Xi-nomics” mix of progress and stability and the medium-term 6.3% GDP growth target, as state-owned companies announced double-digit profit increases for the year.
However, the private-sector China Beige Book pointed to retail-industry revenue and cash-flow weakness that will delay “old economy” displacement, especially as commodity-sector companies such as steelmakers once more ramp up capacity and production, contradicting previous pledges.
Central-bank head Zhou Xiaochuan vowed to maintain prudent monetary policy, as big state lenders were poised to enjoy an interest windfall from a 2% available reserve-requirement cut around the Lunar New Year, which will not apply to smaller competitors whose shares plunged.
The Chinese Finance Ministry offered its own mixed signals in describing the “illusion” of Beijing continuing to absorb local-government debt, which reached $2.5 trillion in November, as more than half of current bond issues roll over old obligations under the existing program.
Korea, India, ASEAN
South Korea’s 10% currency appreciation against the US dollar topped the region, and it was the only country to raise interest rates to try to slow accumulation of personal debt, now the highest in the Organization for Economic Cooperation and Development.
India reprised 6.5% GDP growth in the last quarter of 2017 but worse inflation (5%) came with it, and Prime Minister Narendra Modi’s ruling party lost ground in his home state of Gujarat and now faces a dedicated opposition Congress party with Rahul Gandhi officially elected leader.
In the Association of Southeast Asian Nations bloc, Indonesia moves into 2018 split between prominent infrastructure-building forays abroad, with state-company issues of rupiah-denominated “Komodo bonds,” and religious and anti-corruption infighting at home, with President Joko Widodo’s key ally, the parliamentary Speaker, facing graft charges.
Vietnam managed successful initial public offerings, most recently of a popular brewery, but has struggled with corporate debt placement. It may soon tap the Asian Development Bank for help in a snapshot of emerging Asia’s uneven financial-market path despite 2017’s linear rally.