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Global Top Cat

A Whirlwind Tour of Asia’s Emerging Markets

By Yiannis G. Mostrous, on Jun. 21, 2013

A strong US dollar historically has acted as a headwind for Asian equity markets outside Japan; the greenback’s resurgence has given investors yet another reason to pare their exposure to the Asia-Pacific region.

Let’s put the US dollar’s recent strength relative to Asian currencies into perspective.

The US Dollar Index, which measures the greenback’s general international value by averaging exchange rates between the buck and a basket of international currencies, has climbed to a high of about 84.5 at the end of May from a low of 78.9 in February 2013. In recent trading sessions, the US Dollar Index has lost ground. At its current levels, the US dollar is stronger than at the beginning of 2013, but its recent appreciation isn’t worth writing home about.

Moreover, the long-standing inverse relationship between the US dollar and Asian equity markets may shift over time as these emerging economies continue to evolve. Traditionally, a stronger greenback has translated into higher interest rates in these economies, draining liquidity.

But currencies in the Asia-Pacific region continue to grow more flexible, better equipping these emerging markets to deal with a stronger US dollar. Current accounts are, overall, in surplus, corporate leverage is much lower than at any time in the past twenty years, and stock market valuations look very attractive.

Nevertheless, the underperformance of Asia’s equity markets should come as no surprise; the consensus takes time to come to grips with change. In addition, the elevated expectations that investors had for these economies in the beginning of the year didn’t bode well for equity returns.

We expect the MSCI Asia Ex-Japan Index and the underlying economies in this region to follow last year’s pattern and strengthen in the back half of 2013.

Here’s a quick round-up of where these economies stand today and where they’re headed this year.

China should be able to grow its gross domestic product by 7.5 percent to 8 percent in 2013. Although the authorities in Beijing may not indulge in a stimulus program, the current slate of accommodative policies likely will remain in place.

India’s political scene has been rocked with corruption scandals, while ongoing issues with domestic coal production–a necessity to meet the country’s growing electricity demand–have constrained economic growth. That being said, India’s economy may have troughed; indicators appear to have bottomed, signaling that a new investment cycle is on the horizon. The timing is difficult to pinpoint, but we expect the Reserve Bank of India to slash interest rates relatively soon.

South Korea will benefit from an uptick in US and UK economic growth in the back half of the year, while stable commodity prices should keep inflation in check. We expect South Korea’s economy to grow by about 3 percent this year, as capital formation has contributed to the country’s expanding gross domestic product (GDP).

Taiwan stands to benefit from a recovery in global demand, especially for information technology. We expect its economy to expand by more than 4 percent this year and enjoy a current account surplus.

Indonesia continues to enjoy strong domestic demand, though the government’s plan to hike fuel prices will be a near-term headwind. Over the long term, the phasing out of these subsidies should help to rationalize demand. Inflation remains the biggest question mark–if consumer prices grow at a faster rate than 4.5 percent, the central bank could opt to raise interest rates. Such a decision would weigh on the stock market. Indonesia has also lapsed into a current account deficit, and the country’s coal and palm-oil exports to China have slipped. The domestic stock market appears expensive at current levels, but we expect the economy to grow by 6 percent and the current account deficit to diminish.

Hong Kong’s economy has recovered steadily; our outlook calls for real GDP to grow by almost 4 percent this year, fueled by domestic demand and a robust labor market. A recovery in the global economy should provide a boost in the back half of 2013.

The Philippines’ economy has been firing on all cylinders; its GDP will expand by more than 6 percent this year. Standard & Poor’s earlier this year upgraded the Philippines sovereign credit rating to investment grade (BB+), rewarding the country for its declining public debt, which stands at 49 percent of GDP. As the economy enters a phase of sustainable growth, the country’s financial authorities are preparing to manage this success.

Malaysia’s economy has benefited from strong domestic demand, with imports of capital good ups 12 percent from year-ago levels in the first quarter. The government’s Economic Transformation Program, which was announced in 2010, has gained traction and spurred a lot of growth. Gross fixed capital formation as a percentage of nominal GDP has surpassed 20 percent in each of the last two years–a trend that we expect to continue this year. Malaysia is in the early stages of an investment cycle that should sustain economic growth of about 5 percent for the foreseeable future.

Singapore has emerged as a leading financial center in Asia, a development that has positioned the services sector to drive GDP growth. However, the government is seeking to increase productivity in the domestic economy and reduce its reliance on foreign labor. As this process continues, expect Singapore to grow by about 2.5 percent this year.

Thailand is the final stop on our whirlwind tour of Asia’s emerging economies. Robust employment levels and domestic demand fueled 6 percent GDP growth in 2012, pushing the country into a current account deficit for the first time in more than seven years. We expect Thailand to grow its GDP by more than 5 percent in 2013, thanks to increased investment in public infrastructure. Investors should keep an eye on household debt, which rose to 77.6 percent of GDP and 129 percent of disposable income in 2012. 

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