Is Asia’s long-term story in tact?


Asian equities have suffered in recent months as talk of tapering from the Federal Reserve’s creates the risk of money flowing out of the region, leaving investors questioning their long-term attractiveness.

The MSCI Asia index has fallen 12.23 per cent since 22 May 2013, when Fed chairman Ben Bernanke first spooked the markets by suggesting the central bank may consider slowing its $85bn-a-month bond-buying programme later this year.

This compares with a decline of just 3.9 per cent in the MSCI World, according to FE Analytics. Over the year to date, the MSCI World has advanced by 18.5 per cent since the start of 2013, more than double the 7.1 per cent gain in the MSCI Asia.

India and Indonesia, the region’s third- and fifth-largest economies, especially have been the target of renewed selling pressure in August as the market became concerned about their widening current account deficits and falls in their currencies.

However, commentators note that both countries have made moves to alleviate these problems and highlight the long-term drivers behind Asia’s economy and stockmarkets.

Capital Economics Asia economists Gareth Leather and Daniel Martin write: “For some economies – notably India and Indonesia – efforts to shore up weakening currencies are forcing central banks to adopt tighter monetary policy than they otherwise would. That is a particular concern for India where the economy is already weak.

“However, most economies are in a good position to withstand currency depreciation. And the stronger global backdrop which lies behind recent market moves should help much of the region, especially the newly industrialised economies [NIEs].”

Capital Economics estimates the four NIEs of Hong Kong, Singapore, Korea and Taiwan as well as the south east Asia region are likely to have witnessed stronger growth in the second quarter of the year. It adds that a stronger US economy and the continued improvements in the eurozone will support Asian exports.

Schroders Indian equities manager Manish Bhatia points out that India and Indonesia were the two countries most at risk of foreign capital flight when concerns of tapering started to emerge in May.

Despite this, the manager notes that investment opportunities can still be found in both countries.

In India, the weakening rupee means export-oriented sectors such as IT services and pharmaceutical firms should benefit, while the country’s consumer sectors are proving relatively defensive and private banks are better managed than the state-run peers. In Indonesia, telecoms have proved resilient to macro headwinds.

“So what is the outlook for these countries but also the wider region at large? India and Indonesia will continue to experience macroeconomic challenges in the next six to 12 months. The US Fed’s tapering will also impact the rest of the region and we expect volatility to continue but overall, we maintain our commitment to the long-term fundamentals of the region’s growth,” Bhatia says.

“Other Asian markets, including fellow ASEAN heavyweights Thailand and the Philippines, will continue to drive growth, aided by infrastructure programmes and growing domestic consumption.”

Henderson Far East Income trust manager Michael Kerley also warns that Asian markets will be hit by volatility in the short term. He notes that investors have been more interested in global cyclicals and exporters recently, which has affected the performance of his defensively positioned portfolio.

Kerley adds: “We remain positive on Asia in the medium to long term owing to strong economic fundamentals and compelling valuations.

“In the short term however, we expect markets will be dictated by the strength of the recovery in the US and China and speculation over the ending of quantitative easing.”