Monetary easing by Western governments in response to the 2008 financial crisis has led to a significant flow of money into higher yield asset classes. Major benefactors of such policies have been emerging Asia currencies and equity markets, with funds pouring into the Asian markets since 2009 as one of the few regions with genuine growth prospects.
With Western economic activity showing tentative signs of resurgence and increasing speculation regarding tapering, Asian markets have been experiencing evident signs of economic slowdown as investment shifts back to the Western economies.
To provide a snapshot of the effect of western monetary easing, Indonesia stands out as a fascinating example. The Indonesian Rupiah rallied some 30% off its lows versus the US dollar in late 2008 but we have seen a reversal of that performance with the rupiah spot rate dropping more than 7% against the dollar this quarter.
Other Asian markets have had similar woes, with India’s domestic currency depreciating by more than 15% since beginning 2013.
So have the Asian markets lost their power?
Although the pressure on Asian investment looks set to continue, it would be wise to assess the individual country position before committing. Governments are taking fiscal and monetary action and have solid fundamentals to facilitate growth in the medium term. As is evident in the West, high debt levels are detrimental to economic growth, whilst solid government accounts are rewarded and healthy consumer balance sheets allow credit growth to be a strong domestic growth driver.
On this basis Malaysia, Singapore, Philippines, Indonesia and Russia appear well positioned, although concerns over Russian corporate governance weigh heavily and in Indonesia attention will shortly turn to the general elections next year. Other countries have higher debt levels and are considered riskier. There remain significant risks to commodity currencies such as Australia whilst bullion, a traditional hedge against central bank profligacy and currency debasement, may respond and strengthen in the coming months.
China’s new government doesn’t want to risk reflating the bubble, in contrast to the West, it prefers to deal with matters now rather than later. This risks a slowdown in growth but with structural reforms such as increased incentives for foreign investment, Xi Jinping is thinking about the next decade and may take short-term pain to reap benefits later on.
Given Japan’s debt of 215% of GDP (14x government revenue), the traditional response of printing money to inflate the debt away could lead to significant yen depreciation.
It remains possible that, despite the recent economic pick-up, the central banks decide against a reduction in monetary easing measures in the shorter term, the risk of tightening too early being considered detrimental to the recovery and politically difficult. If this indeed proves to be the case or Asian economic growth crowds out such stimulus reductions, the recent falls in emerging Asia currencies and markets could provide opportunities for a bounce.
Hang on to your hats.