The region’s bull market has come at a price: large-scale capital inflows have piled upward pressure on currencies while raising the risk of asset bubbles

  • By Sid Verma
  • 02 May 2010
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China’s current account deficit is the latest sign of how the financial crisis has turned the global economy on its head. The world’s production house, with its insatiable thirst for natural resources and cars, racked up a $7 billion trade deficit in March – while US consumers continued to delever.

As the rich world buckles under its debt burden, Asia bulls say China is coming to the rescue by exporting capital – and importing an increasing volume of western-made goods – to pull the global economy out of the gutter.

The March deficit may prove to be a cyclical blip rather than a broader shift in China’s growth pattern. But emerging market enthusiasts have plenty of ammunition to say Asia is the crown jewel of the financial markets in the new decade. “Asia looks much better than any other region in the world due to its strong growth and low indebtedness,” says Jean-Charles Sambor, head of Asia research at the TCW Emerging Market Fixed Income Fund.

According to Bloomberg data, Chinese banks have dethroned US banks as the most highly valued financial institutions by market capitalization, claiming four of the top five publicly listed banks. Meanwhile, PetroChina, ICBC and China Mobile have joined the ranks of the five biggest global companies, in a growing sign that western corporate dominance is increasingly under threat.

And across the region, equity and debt markets have outperformed the developed world thanks to Asia’s quick economic rebound, capital inflows, domestic stimulus policies, and resilient corporate earnings.

According to the Institute for International Finance (IIF), emerging Asia is the unambiguous leader of the global business cycle and will continue to dominate the bulk of private capital inflows in the coming years. It calculates that net private flows to Asia rose from $171 billion in 2008 to $191 billion in 2009, and will surge further to $273 billion in 2010.


A pick-up in investment, inventory restocking, fiscal stimulus and growing domestic demand are fuelling regional growth. As a result, many investors have embraced the LUV ideogram, coined by Martin Sorrell, chairman of the communications giant WPP group, to describe an L-shaped economic recovery for western Europe, a U-shaped one for North America and a V-shaped recovery for the Brics (Brazil, Russia, India and China) and other fast-growing Asia economies.

This latter pool includes Indonesia, Philippines, South Korea and Vietnam. Even bearish consultancy Roubini Global Economics forecasts Asia will grow 6.3% in 2010 after 3.3% in 2009 and the 6% average during 2003 and 2008. Meanwhile, Deutsche Bank predicts emerging Asian growth to top 8% this year, double the growth rate expected in Latin America and the US.

But the boom years are rarely smooth, and the rush of global liquidity, thanks to record low G7 interest rates, has sparked a liquidity-led rally that threatens to stretch stock and bond prices in Asia. Equity and bond markets have surged since March 2009, with asset prices back to levels before the mid-September 2008 collapse of Lehman Brothers.

The MSCI Asia Pacific Index has climbed over 10% from its 2010 low on February 8, as confidence in the region’s growth prospects takes hold. Investors are paying more for Asian stocks than US-listed shares amid expectations of higher corporate earnings that will boost equity returns.

As Emerging Markets was going to press, the MSCI Asia Pacific was trading at 16.4 times estimated profit, compared with 15.5 times for the benchmark index for US equities, the Standard & Poor’s 500.

Meanwhile, the margin between Asian and US government bonds, seen as safe-haven assets, has narrowed dramatically over the past year and stands at pre-crisis levels. The spread on JP Morgan’s Emerging Markets Bond Index (EMBI+) is 2.6% over US Treasuries. This is still higher than its all-time low of 165bp in January 2007 – the height of the bubble in global credit – but the spread represents a fraction of the record peak of 16.64% in September 1998, during the Asian debt crisis.

Asian financial markets have progressed from a risk relief rally, as prospects of a double-dip global recession receded, to a liquidity rally – thanks to interest rate cuts from G7 central banks – to a “sustainable, economy-led rally”, says UBS Asia chief economist Jonathan Anderson. He argues that “equity and bond prices reflect resilient corporate earnings”.

Antoine van Agtmael, chairman of Emerging Markets Management, which oversees up to $14 billion of equities globally, says Asian stocks are now “fairly valued” as the 16.4 forward price to earnings level is the long-run average for Asian stocks.

As a result, investors are set for lower returns relative to double-digit 2009 levels, prolonged global market volatility that will reduce risk-adjusted returns for emerging market assets and higher regional inflation.

Domestically, the withdrawal of fiscal stimulus, “the waning inventory cycle and tighter monetary policy will weigh heavy on Asian markets in the second half of the year,” says Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. If economic recovery in the US and Europe is derailed, capital outflows and asset price correction will weaken the balance sheets of governments and companies.

But for now, the consensus view is that the global economic recovery is taking root and capital inflows will stay strong as the US Federal Reserve and Bank of Japan are set to hold historically low rates this year.

In the near term, markets will be volatile as western sovereign debt jitters, and fears over exit strategies from stimulus policies take hold. But more generally, the consensus view is that the global crisis has set off a structural bull market for Asian assets. If the region manages to revamp its predominantly export-led growth model – and it’s a big if – by stimulating domestic consumption, bulls argue the crisis has only enhanced the investment proposition for the region.

“Asia’s solid fiscal, household and corporate balance sheets, well-capitalized banks and strong external liquidity position underpin its strong structural growth story versus the developed markets,” says Johanna Chua, Citigroup’s chief Asia economist. As a result, the region has huge room to gear up and, thus, attract more capital.

Falling sovereign risk premiums and strengthening credit quality of Asian firms should “lower the premium investors demand for Asian assets” relative to the debt-burdened developed world, says Hung Tran, head of the capital markets department at the IIF.


But what will the Asian investment landscape look like in the next five to 10 years? Equities are the clear winner, says Anderson at UBS. He says the huge number of Asian firms that have yet to join the global financial economy will ensure the supply of equity will outstrip debt in the coming years.

Sambor at TCW says: “there is a shortage of investable debt assets in Asia, both sovereign and corporate, as banking liquidity offers attractive cost of finance” while regional borrowers tend to be averse to debt. Nevertheless, the region’s debt stock is set to grow as the financial system deepens and borrowers take on more debt – against the backdrop of high corporate savings – to boost returns to equity investors.

However, Anderson says public and private equity markets are set to outperform debt markets, as high systemic inflation and strong growth will boost corporate earnings in nominal – and to a lesser extent, real – terms. “The real place to be in Asia is equities as this provides investors with the best way to gain exposure to regional growth,” he says.

An Asian equity boom could reach dizzying heights if policy-makers court foreign equity capital. Chua at Citi predicts China will, in the coming years, relax foreign restrictions in its domestic equity markets as a stepping stone to liberalizing its capital account. In addition, Indian regulators could soon court public listings of foreign companies, she says.

According to Citi, emerging Asia’s share of the global indexed equity market is 7.3% compared with the US, Japan and the eurozone’s combined share of 66%. This highlights the large room for Asian equity growth in tandem with expanding regional economies.

But the bull market comes at a price. Large-scale capital inflows have placed appreciating pressures on currencies and heaped on the risk of asset bubbles.

As a result, Asian policy-makers, across the board, have adopted soft capital controls over the past two years. Taiwan has restricted foreign investment into dollar-denominated time deposits in domestic banks; South Korea has introduced restrictions on domestic banks’ forward currency trading; and India has tightened rules on external borrowings of companies. Hong Kong, Singapore, India, South Korea and Vietnam last year tightened real estate regulation to contain the risk of real estate bubbles. Meanwhile, Malaysia, Thailand, India and China already have several capital controls, put in place before the crisis, including restrictions on foreign investment in domestic debt.

But unless Asia allows greater exchange rate flexibility, asset bubbles in equity and real estate markets will inevitably form, even with beefed up regulation and restrictions on foreign investment, says Hung Tran at the IIF. This is down to the policy conundrum known as the impossible trinity: the hypothesis that it’s impossible to manage exchange rates, control inflation and allow the free movement of capital at the same time.

Tran says localized asset bubbles are already brewing in property markets in Hong Kong, Macau, Taiwan, certain markets in mainland China and the Mumbai commercial property market. But this is largely due to bullish domestic investors rather than non-resident holdings, he says, and that public equity and debt markets across the region are not in bubble territory.

According to Citi, emerging Asia in the next two years will account for 35–38% of global growth compared with the combined share of 8–9% for Latin America and emerging Europe.

But there’s a downside. Asia’s integration with the global economy has put the region’s domestic policy mix in the spotlight due to its increasing impact on global interest rates, currencies and asset prices.

Unless Asian nations, principally China, take measures to boost domestic consumption, trade wars and tensions with the US and EU will kick off. “Emerging Asia needs to take the lead and bring about a more rebalanced global economy by changing policies that favour an export-led economy,” says Tran.

Investors, seduced by Asia’s business cycle, would do well to remember that, in a globalized economy, the ascent of the East will be anything but a smooth journey.

  • By Sid Verma
  • 02 May 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 25,385.87 103 7.10%
2 Deutsche Bank 25,125.19 81 7.03%
3 Bank of America Merrill Lynch 22,023.57 59 6.16%
4 BNP Paribas 18,766.65 109 5.25%
5 Credit Agricole CIB 18,157.63 105 5.08%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%