Guides to Asian Stock Valuations Now a Puzzle
Followers of Asian and so-called emerging market stocks must be wondering about the relevance of factors which in theory are supposed to drive those markets, and the currencies in which they are denominated.
Volumes have recently been written about the supposed vulnerability of that asset class which continue, despite any lack of logic or cohesion, to be described as “emerging markets”. This encompasses everywhere from Korea to Pakistan, Taiwan to Colombia – but as yet excluding Vietnam and Argentina which remain in the “Frontier” category despite market capitalization and turnover which are well ahead of Manila. Indeed, Vietnam’s turnover has now surpassed Malaysia, in the 1990s the darling of western institutions.
What are supposed to be the guides of valuation? National economic growth; earnings growth of listed companies; price/earnings ratio valuations relative to interest rates and past norms; national financial and currency stability as measured by debt ratios, monetary growth, current account of balance of payments; role of foreign institutions in the local market; political and institutional stability.
Yet look at market performances of the past one month and one year and then try to find the driving factors from which any generalizations could be drawn.
India for example has seen its Sensex index rise by 18 percent over the past year, including 4 percent in the past month despite dire warnings from foreign pundits about impending emerging market distress. Admittedly the rupee has fallen by 4 percent against a weak US dollar over the year which reduces its gain in dollar terms. But it is still a strong performance at a time when India’s current account deficit has been rising thanks to oil prices and gold imports, while government finances are still in need of improvement and clouds still hang over major banks. For sure, inflation and GDP growth are satisfactory but India is by no means a cheap market.
Meanwhile Indonesia’s market has seen a 7 percent fall over the past month and 1 percent from a year ago on top of a 2 percent currency decline against the dollar. The fear is of interest rate rises to prevent currency weakness in the face of rising dollar rates. Yet valuations are not stretched, the economy, as always, is growing but less quickly than hoped, and the government deficit well within conservative parameters.
The same could be said for the Philippines which has seen a 4 percent fall over the month and zero gain over the year while the peso has slipped by 3 percent against the dollar. The market is also narrow in scope and turnover compared with Southeast Asian peers and still with higher valuations than most.
On a 12-month basis the outstanding currency performer has been the Malaysian ringgit, up 9 percent against the dollar. But that was more a recovery from politically driven fears and the multi-billion 1MDB scandal which had driven it to a clearly undervalued RM4.30 to the US dollar. But currency revival, strong official GDP growth numbers and continuing current account surplus failed to energize stocks which are up just 2.5 percent on a year ago and down a modest 1 percent on the month.
Contrast this with Thailand where a huge current account surplus has driven the currency to a 6 percent gain against the dollar over one year while stocks have risen 13 percent. The economy is unexciting but with interest rates held down by liquidity and a desire to avoid further currency appreciation, Thailand makes the case for the advantages of modest GDP growth and modest government deficits as the best recipe for steady if unexciting stock performance.
Indeed Thailand may be caught in the middle income trap but with its aging demographics it has plenty in common with advanced Asian economies, Japan, South Korea, Singapore and Taiwan .all of which saw both stock market and currency strength over the past year – Japan’s market up 13 percent and the yen 2 percent, Korea up 12 percent with the won 6 percent higher, Singapore’s market and currency similarly. Taiwan’s market is only up 6 percent on a year after a recent steep fall in tech stocks and has seen only a small currency gain against the US dollar.
The volatility winner has been the relative newcomer, Vietnam, down 11 percent over the past month but still up 44 percent over a year. The volatility has come despite continuation of stability-focused financial and debt policies which have keep inflation in the low single digits and the currency rock-steady against the dollar. Meanwhile the current account remains in surplus and the economic growth is stable and corporate earnings strong.
Vietnam’s strength and weakness is the immaturity of its stock market and restrictions on foreign ownership which, together with local speculative money, have driven a few large-capitalization stocks to unrealistic levels, though much of the market remains inexpensive. Bond yields also fell to unsustainable lows. Now Vietnam faces a flood of new issues of significant companies. This is good for the market in the medium term but may mean more short term pain.
Meanwhile, fitting China into any pattern looks problematic. The currency has outperformed, gaining 7 percent against the dollar over the year but stocks have gone sideways and are now 2 percent lower than a year ago, as fears of fallout from past bad lending practices, trade war concerns and slowing GDP growth have cancelled out positives factors. Nor do movements in China’s markets appear to have much direct impact on its Asian peers.
The same could be said of global political developments. Even trade war threats and the swings and roundabouts of Trump tweets have appeared to have little impact other than a few kneejerk trades. Local politics can affect local markets as in Malaysia and more recently Korea, and those in the Middle East impact the oil market, but generally fears of wider conflicts are shrugged off.
Make of this past performance in Asia and the factors behind it what you will. Who could have forecast that the US market, as measured by the S&P 500, would be 13 percent higher than a year ago despite rising interest rates, fast rising current account deficit and a steep increase in government borrowing? In the age of FAANGs, (Facebook, Apple, Amazon, Netflix and Alphabet's Google), tax cuts for the rich and corporates, and buoyant earnings, why care about what comes next?. Tomorrow is another day. That is the only forecast.