What are Asian stock markets telling us about the Asian outlook? Has performance over the past year reflected real prospects or just been the result of random influence and central bank manipulation? Are there bubbles among the top performers or buying opportunities at the bottom?
There is of course one runaway winner: China. Despite falling 5 percent in the past month the Shanghai index is still up 118 percent. Add in that the renminbi has only very slightly weakened against the dollar while most Asian and European, Australasian and Latin American ones have declined significantly.
There is little doubt that a big bubble exists in some sectors of the China market, driven by government approvals and a steep rise in margin lending. It also comes in the face of the steady lowering of GDP growth expectations. But it is not entirely fanciful given that big state enterprises have been less bubbly and China is also enjoying a terms of trade gain thanks to the collapse of energy and other raw material prices. A year ago many of these stocks could be viewed as undervalued. That is no longer the case, but probably no cause to ditch the less speculative counters.
Hong Kong meanwhile has been torn between fully joining the China bandwagon and fears of US interest rate rises which would put an end to its long-lived property boom. This schizophrenia is reflected in a rise of only 19 percent in the Hang Seng index despite some spectacular performances by speculative mainland stocks. The mainland components of the Hang Seng index are heavyweight state companies in energy, finance and telecoms.
What is striking however is that the two economies perceived as most dependent on China growth, Taiwan and Korea, have both had anemic markets – Taiwan up 2 percent and Korea 5 percent. Both have faced increased competition from Japan’s weak yen, down 20 percent over 12 months. But their own currencies have shown resilience with the won down 9 percent and the NT dollar only 3 percent.
Both have aging populations which constrain domestic demand. Korea also has high household debt levels and an ongoing struggle between the interests of shareholders and those of chaebol families which create structures enabling them to keep control with only minority stakes. Nonetheless both economies enjoy strong external accounts, relatively stable currencies and politics and no signs of irrational enthusiasm. The yen decline has probably come to an end and exports have prospects of a modest pick-up in China and developed countries.
At the other end of the performance scale to China is Malaysia, down 8 percent in 12 months and with a currency which has also fallen more steeply than most – down 18 percent. Is this an irrational response to the scandals and political uncertainties which drive local money away and deter foreign investment? Or is it simply a reflection of the impact of low energy and palm oil prices crimping incomes and reducing the government’s ability to stimulate the economy given its rising debt level?
The politics just might be approaching their darkest before a new dawn. But it is difficult to see much prospect of a turnaround in commodities over the next year given the length of the previous up-cycle. Nor is there anything new in the economic picture to offer relief. Indeed, there may well be less cash flowing from oil-rich Arabs to the likes of the Iskandar project or the ill-starred 1MDB state fund. Maybe instead of a pickup over the next year Malaysia will finally get the real pain which in the mid-1980s forced it to reform.
Many of the same things apply to Thailand whose market is up a meager 0.4 percent over 12 months but whose currency has fallen only 5 percent against the dollar, and Indonesia with a 2 percent market rise and an 18 percent currency decline. Thailand has a broader export base and its external position is satisfactory but weak demographics and little investment in higher technology industries will keep growth low.
The Thai market is far from pricey so it may be a safer haven than some others in the region. That includes Indonesia, where the external picture has improved rapidly but only thanks to a sharp drop in imports as commodity price falls and a weak rupiah have constrained demand. Currency stability now may thus be coming at the price of the steady growth to which Indonesia has been accustomed. There are still gains to be had from investment commitments made while Indonesia was flavor of the year, but nationalistic policies will drag on the investment that is now needed to offset weak export prices.
However in the case of Indonesia as with Malaysia and Thailand, market weakness has possibly been exaggerated by fears of the impact of the rising dollar on their foreign debt burden. This has led to a general sell-off of so-called Emerging Markets. But what may apply to South Africa, Turkey and others is not replicated in Southeast Asia where foreign debt levels are lower and current accounts either in balance or with readily financeable deficits.
The overall sense of east Asian (except China and Japan) market malaise is well represented by Singapore, up just 2 percent over a year and a with a currency that has declined by 7 percent against the US dollar. All this reflects weakness in the Indonesia and Malaysian economies, difficult conditions for some export industries, slower growth in China, some concerns over the property market and commodity traders Noble and Olim. It may not be exciting but on a price earnings ratio of around 14 it now looks a relatively low risk market.
Of east Asian markets, Philippines and Vietnam remain outliers. The former is far from cheap but the underlying economics and currency stories look sustainable and the politics, if messy, is no worse than usual. Up 12 percent over a year and with only a small currency decline, risks from US interest rates rises are limited. The same applies to Vietnam which has sustained export growth despite the commodity price falls while restraining money and import expansion. It is up 14 percent over a year, most of which has come in the past three months as foreigners have returned. Any raising of foreign ownership limits could see a further break-out. Meanwhile earnings growth is supporting current valuations which remain relatively modest.
South Asia has been a major beneficiary of lower energy prices and hopes for improved politics. Nonetheless with Pakistan up 14 percent and India 12 percent over 12 months and India still basking in hope for Modi, corporate results and improved government finances may be needed to justify much further advance.
Yet if much of Asia looks dull most of it may be a safer place to be than Japan where the 32 percent rise in the Topix over one year has been driven as much by the currency decline as by improvements in other indicators. Or Europe where central bank largesse and a weakening currency have been behind double digit market rises of France, Germany and Spain despite ongoing Greek crisis. (The exception is the UK where markets overall have barely moved due to heavy exposure to energy and mining).
As for the US, despite occasional hiccups, despite the strong dollar, the S&P 500 is up 8 percent over 12 months despite weak earnings and the constantly postponed threat of interest rates rises. The Nasdaq 100 is up 18 percent as some tech bubbles again. So the US looks another developed market more likely to go down than up.
So maybe Asia is the place to be after all while other developing region markets such as Brazil, South Africa, Chile and Turkey plus commodity-dependent Australia may have further to fall, at least in US dollar terms. Indeed, Australia may have further to fall than any significant emerging market. Meanwhile the winding down of monetary stimulus almost everywhere could also mean the winding down of price earnings ratios everywhere, not just those like the US where they are conspicuously high by almost any yardstick.