Asian stock markets put 2015’s double-digit losses behind them in the first quarter. But the 1.5% regional gain in dollar terms on the MSCI Index lagged the 5% global emerging market benchmark one on mixed core and negative frontier universe performance. Among the largest markets by economic size and capitalization Korea and Indonesia stood out, while India flagged and China recovered ground.
In the middle tier Malaysia, Thailand and the Philippines were all positive, while smaller exchanges Pakistan, Sri Lanka and Vietnam were disappointing. The Asian Development Bank’s March local currency bond analysis, covering developments through end-2015, warned at the same time that “confidence loss” remained a main risk as foreign ownership held steady at over 30% in Indonesia and Malaysia, and declined to half that level in Thailand.
Mainland China is two-thirds of the ADB’s $9 trillion regional domestic bond market, and the central bank removed the onshore quota for qualified international investors in March to close the access gap versus neighbors. Investors mostly extended last year’s gloom through February, when the Federal Reserve paused after one interest rate nudge and domestic demand-led stories regained favor, before a sentiment turn that could again sour amid banking, debt, political and diplomatic headaches.
China was down 5% for the period, as the yuan or renimbi reversed its weakening trend amid rumors of a secret G-20 currency deal at February’s summit in Shanghai with senior officials rejecting major devaluation. Foreign reserve capital outflows slowed from the previous $100 billion per month pace as the Bank for International Settlements explained the cause as normal company borrowing repayment.
The International Monetary Fund, after admitting the yuan into the Special Drawing Right, called on Beijing to honor its associated commitments for timely and transparent statistics, and currency forward positions were revealed with a lag. Ratings agencies downgraded the investment-grade sovereign outlook from stable to negative, as the Purchasing Manager Index around 50 indicated GDP growth may not reach 6.5%. Pure government debt, not counting quasi-sovereign liabilities to cover state company obligations over 200% of GDP, has itself ballooned to an estimated 50% of GDP with heavy infrastructure spending and local authority debt rollover, the agencies pointed out.
Bank non-performing loans are at a decade high, and at less than 2% of the total are vastly under-reported by international standards, especially with disclosure gaps in wealth management and other “shadow” products, according to industry experts. The main exchange-listed institutions registered poor earnings as a provincial lender launched an initial public offering in Hong Kong to tepid reception.
Exports plummeted at a record monthly pace in February and wholesale deflation has dragged on for years as the Communist Party Congress pledged once again to cut excess industrial capacity and avoid an economic “hard landing.” It unveiled a vague plan for coal and other sectors to shed millions of jobs in exchange for worker retraining and transition support, but state enterprise reform has not been pushed strongly since the era of World Trade Organization entry.
The same stalled modernization drive, reflected in a lackluster budget increasing rural handouts, prompted Indian stocks to sink 3% as foreign investor enthusiasm diverted to Indonesia in particular, which was up 10%. President Joko Widodo purged his early business-unfriendly cabinet and presented a “big bang” liberalization program opening dozens of sectors, including e-commerce and other services, to international participation. Private consumption as the chief economic driver rose 5% in 2015, and foreign direct investment jumped 20% in rupiah terms.
Malaysia matched Indonesia’s gain with a temporary lull in the 1MDB scandal, although Prime Minister Najib Razak was again pressured for resignation by a ruling party group headed by his predecessor Mahathir Mohamed. Among MSCI Frontier markets globally Sri Lanka was at the bottom with a 17% drop after currency depreciation and fiscal austerity imposed by IMF program return.
Vietnam faded along with free trade Trans-Pacific Partnership momentum for a 7% reversal, as neither the Obama Administration nor the leading US presidential candidates press for congressional passage, leaving Asian counterparts to promote their own scarce signature competitive breakthroughs unable to improve financial market direction into mid-year.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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