Asian Markets Steady as She Goes

With US and European central banks finally beginning to move away from ultra- loose monetary policy, there are plenty of reasons to question the durability of the gains seen by global stock markets over the past year, and in some cases five and 10 years. Some assume tightening will be particularly damaging for emerging markets, especially those buoyed by foreign portfolio flows.

However, a whistle-stop tour around Asian markets suggests little such vulnerability. Indeed, it is a good illustration of the disconnect of many Asian markets from each other. It also illustrates the relative stability of most Asian currencies when measured against the movements of the US dollar, euro and yen and pound against each other.

Stocks almost everywhere have seen double digit rises over the past 12 months. Yet on a five- year view it is hard to argue that this is a raging bull market in Asia, or that modest rises in interests rates elsewhere will have much impact if any Asia where they are already mostly higher and where foreign debt is generally modest.

On a five-year view, the S&P 500 has risen very steadily and is now 80 percent above its level a half decade ago, easily outdistancing profit growth. However, the increase over 10 years is slightly less as the index slumped from around 1525 in September 2007 to a 2008 crisis low of 750.

The Eurostox 50 index of leading European companies by comparison is up only 40 percent in five years and still 5 percent below its 2015 level and 20 percent below its peak a decade ago. Meanwhile the value of the euro, now worth $1.19 to the US dollar, has swung between US$1.59 and US$1.04.

That puts Asian currencies into perspective. Even the traditionally volatile Indonesian rupiah ranged from Rp9,500 to Rp14,500 to the US dollar over a decade and has been quite steady for two years at around 13,000. The once inflation-driven Vietnamese dong has only fallen from 16,000 to 22,700 over the decade and been very steady over the past year.

Currencies of middle to higher income Asian have generally been very stable when measured against a basket of currencies. Thus Taiwan, Thailand, Singapore and China have been moved over time more by the relative performance of the US currency than by changes in the domestic situation. Two exceptions to that more recently have been the Malaysian ringgit, driven down by the 1MDB scandal and related politics, and the steady fall in the Philippine peso over the past year from 47 to 51 to the dollar due to deterioration in its current account and uneasiness over its politics.

Currencies have remained generally stable despite interest rates which have only recently stopped falling, and despite the fact that much footloose Asian money, particularly Chinese but including Thai, Singaporean and Malaysian has headed west, often into already fully priced real estate. It is reasonable to assume that even if the western bull markets come to a sudden end and cut off some portfolio flows to the east, the reverse is also true and less money will flow from Asia.

As for stocks, it is hard to find markets in Asia not reasonably supported by earnings and dividends. Growth rates may be a problem in most of the region as they struggle with demographics and/or middle-income traps.

The Jakarta composite is at a high around 5,900 after a strong rally and with a 70 percent gain in five years may find further advance in the short term difficult. Likewise, India’s near 80 percent rise to 32,000 on the Sensex may be running ahead of economic and corporate progress. Vietnam too may need pause for breath. But despite recent gains China, Taiwan, Hong Kong and Thailand are far from peaks and, like Japan, now offer well-supported dividend returns well in excess of the money market and at least equal to five-year bonds.

For many Asian markets, 2017 has simply been a recovery from weakness in 2016 which saw sharp falls from peaks in 2014 or 2015. Singapore for example is still 10 percent off its 2015 peak and Hong Kong’s Hang Seng index still just shy of that mark. China may not get back to its 2015 spike for years but the Shanghai market overall is no long an alarming place to be.

All told, the arrival of bears on Wall Street, and perhaps also in Europe, which has lower valuations but been rising faster, cannot but have a knock-on effect in Asia. But as Asia’s post-crisis history shows, there is more resilience and less volatility than in the rest of the world, developed or developing.