Asian markets, laggards in the asset price boom of the past three years, are poised to return to investors’ favour as global liquidity tightens.
Spiralling commodity prices and historically low interest rates have helped slash risk premia, a fact which has eroded the price advantage that Asia’s more stable economies have enjoyed over their central European and Latin American counterparts. Now with the US, Europe and Japan tightening monetary conditions, money managers are expecting a widening of spreads, which may benefit Asia’s most robust economies such as Taiwan and South Korea.
“Clearly the attraction of Asian markets has increased quite sharply,” said Julien Garran, head of asset allocation at Legal & General in London.
While east European markets are beginning to look less attractive as currency plays, some Asian economies are coming under increasing pressure to let their currencies appreciate, presenting an additional attraction to European and US investors, Garran notes.
“Generally the environment has been much more favourable for non-Asian markets, it can’t continue for ever,” noted Robert Davy, an emerging markets fund manager at Schroders.
Asia’s emerging markets offer a broad range of stories, from India’s trade deficit to China’s surplus, from the political volatility of Thailand to the stability of Singapore. Taiwan and South Korea are two countries identified by investors as underperformers in recent years, which may now benefit from strong domestic stories and the competitiveness of their blue-chip companies. Indonesia is also tempting as the government pushes through reforms and China sucks in commodities.
It’s not all good news for Asia though. As the flow of international funding wanes, those countries that have been the biggest beneficiaries may lose some of their lure. Indian central bank governor YV Reddy told Emerging Markets earlier this year that he is on the watch for asset bubbles, domestic and international. India’s growing pool of wealth has sent equity and property values rocketing. Furthermore the country’s trade deficit will reflect negatively if the global environment becomes choppy.
Opinions on China are more mixed. The strength of the economy is in no doubt but questions persist over how effectively tradable assets can capture the upside. The diversity of both stock and bond markets is a concern.
“The opportunities have been very much at the extreme ends of the spectrum. We haven’t really had a lot of stuff in the middle, which is where we would be interested,” said Kevin Colglazier, head of fixed income at Standard Bank.