Asia's Emerging Markets: Has the recovery run its course?
Having been battle-tested during the worst economic recession of our lifetimes, a robust growth upturn has clearly become evident in most emerging markets, particularly Asia.
Emerging Asia – Its credentials
With much credit to Asian notables such as India and China, global emerging markets have now come to account for:
• 86 per cent of the world's population,
• 75 per cent of its land mass/resources,
• 68 per cent of its foreign exchange reserves and
• 49 per cent of world’s Gross Domestic Product (GDP).
Remarkably, since 1992, the average global emerging market economy has grown by around 130 per cent compared with 38 per cent for the average G7 economy.
However, despite the impressive growth and increasing international dominance, forecasters have had a tendency of underestimating the recovery of Emerging Asian economies and markets especially from global recessionary phases and market downturns.
This was evident in the 1997 Asian financial crisis, the global IT bust in 2000/01 and recently, early this year when it was predicted that Emerging Asia's economies would not recover until after the US and Europe revive. Yet Asia's supposedly export dependent economies have quickly resumed growth before the rest of the world.
In recent history, it is worth highlighting that GDP growth in global emerging markets has outpaced the developed world, even in bear markets. In fact, India, China and Indonesia were among the few economies in the world that expanded throughout the global downturn. Recent forecasts suggest that these emerging economies could grow by at least 5 per cent this year, while G7 economies would contract by 3.5 per cent. The growth gap between the two has never been wider.
In all these crises, Emerging Asia's key ingredients of growth - rapid productivity growth, relatively open markets and a high savings rate to finance investment and consumption growth have remained in place.
Emerging (Asian) Markets – The attraction
One of the long-term attractions of emerging markets is the fact that the asset class is under-capitalised. In other words, the supply of emerging market assets does not meet the demand.
Figures from global fund tracker EPFR show dedicated emerging markets equity funds have seen total year-to-date inflows of US$36.1 billion (through August 2009). [As a rough estimate, 70% of which is directed towards Emerging Asian markets].
While there is no doubt that exposure to the asset class has risen robustly in recent years, there remains much evidence that global investors are insufficiently exposed to emerging market equities, especially if growth and liquidity in emerging markets continues to expand.
A recent Merrill Lynch/CapGemini survey of high net worth individuals around the world showed individual investors in emerging markets have 22 to 24 per cent of their wealth in equities versus the 30 to 41 per cent of their counterparts in developed markets. The fact that these investors hold above normal allocations to cash seems to bode well for continued liquidity in the asset class.
On the sentiment front, a recent ING Bank survey reveals that investors in Asia (particularly) have become more optimistic about the global economy and a majority of them are especially bullish on their domestic stock markets. The most optimistic investors among the 10 countries surveyed were the Indians, followed closely by the Chinese.
Is it too late to take the plunge?
The strong run in the equity markets since March 2009 has seen Asia (ex Japan) markets rise over 80% [By comparison, the US markets (measured by S&P 500) have risen around 60% and the European markets (measured by DJ Euro Stoxx 50) around 65%] – causing investors to be worried that Asia's recovery is all priced in.
Indeed, the strength and speed of Asia's current rebound has exceeded most other previous recoveries in the last 30 years. However, there are reasons to believe that Asian markets' recovery is still far from having run its course.
Asian bull markets have lasted between 3 and 5 years. Looking back at each of the last 4 bull markets of Asia (ex Japan) from 1974 onwards, and measuring returns over years 1 to 5, the average performance of Asian equities in the years subsequent to the market trough have been as follows:
year 1: 53 per cent,
year 2: 24 per cent,
year 3: 15 per cent,
year 4: 47 per cent and
year 5: 53 per cent.
(Source: Datastream, MSCI, Citi Investment Research).
Going by this track record, the potential for further gains certainly seems likely.
Negotiating the bumps ahead
Although there’s a solid case to be made for the upbeat longer-term outlook for Emerging Asia, the road to recovery (as with most) may not be that smooth sailing.
A key risk is an early monetary tightening (increase in interest rates). In the past, US Federal Reserve tightening has triggered a correction in share markets globally. However, given the importance budding economic powers like India and China, the financial markets may take their cue from those policymakers as well (or better still, instead).
Here the key development to watch is the return of inflation. One consequence of fiscal stimulus and low interest rates is that liquidity has surged and with it, the risk of inflation has come back. For the moment though, China is still experiencing deflation.
Within Asia, emerging countries like India, China and Indonesia appear more favoured by global investors. These countries will see the highest GDP growth in the region this year, with China estimated at 9 per cent, India 6 per cent and Indonesia 4 per cent.
While this is off their recent peak growth rates, the disparity with the rest of the developed world is widening. They have large domestic economies that can be further boosted with aggressive policy action.
Sunil Khemlani
StoneBridge Securities (NZ) Limited
Email: sunil.khemlani@stonebridgegroup.co.nz
StoneBridge Group is an Australian-owned trading house (accredited with the ASX and NZX exchanges) providing advisory and execution services on Foreign Exchange, Commodities, Futures & Options, Shares & CFDs.
This is not an offer to deal in any financial product and is not specific advice for any particular investor. StoneBridge believes that any information or advice (including any recommendation) contained in this publication is accurate when issued but does not warrant its accuracy or reliability, and is not liable for the future performance of transactions or for any loss or damage arising in connection with this publication. A full Disclosure Statement in accordance with the Securities Markets Act 1988 is available free of charge on request. ”
Having been battle-tested during the worst economic recession of our lifetimes, a robust growth upturn has clearly become evident in most emerging markets, particularly Asia. Emerging Asia – Its credentials With much credit to Asian notables such as India and China, global emerging markets...
Having been battle-tested during the worst economic recession of our lifetimes, a robust growth upturn has clearly become evident in most emerging markets, particularly Asia.
Emerging Asia – Its credentials
With much credit to Asian notables such as India and China, global emerging markets have now come to account for:
• 86 per cent of the world's population,
• 75 per cent of its land mass/resources,
• 68 per cent of its foreign exchange reserves and
• 49 per cent of world’s Gross Domestic Product (GDP).
Remarkably, since 1992, the average global emerging market economy has grown by around 130 per cent compared with 38 per cent for the average G7 economy.
However, despite the impressive growth and increasing international dominance, forecasters have had a tendency of underestimating the recovery of Emerging Asian economies and markets especially from global recessionary phases and market downturns.
This was evident in the 1997 Asian financial crisis, the global IT bust in 2000/01 and recently, early this year when it was predicted that Emerging Asia's economies would not recover until after the US and Europe revive. Yet Asia's supposedly export dependent economies have quickly resumed growth before the rest of the world.
In recent history, it is worth highlighting that GDP growth in global emerging markets has outpaced the developed world, even in bear markets. In fact, India, China and Indonesia were among the few economies in the world that expanded throughout the global downturn. Recent forecasts suggest that these emerging economies could grow by at least 5 per cent this year, while G7 economies would contract by 3.5 per cent. The growth gap between the two has never been wider.
In all these crises, Emerging Asia's key ingredients of growth - rapid productivity growth, relatively open markets and a high savings rate to finance investment and consumption growth have remained in place.
Emerging (Asian) Markets – The attraction
One of the long-term attractions of emerging markets is the fact that the asset class is under-capitalised. In other words, the supply of emerging market assets does not meet the demand.
Figures from global fund tracker EPFR show dedicated emerging markets equity funds have seen total year-to-date inflows of US$36.1 billion (through August 2009). [As a rough estimate, 70% of which is directed towards Emerging Asian markets].
While there is no doubt that exposure to the asset class has risen robustly in recent years, there remains much evidence that global investors are insufficiently exposed to emerging market equities, especially if growth and liquidity in emerging markets continues to expand.
A recent Merrill Lynch/CapGemini survey of high net worth individuals around the world showed individual investors in emerging markets have 22 to 24 per cent of their wealth in equities versus the 30 to 41 per cent of their counterparts in developed markets. The fact that these investors hold above normal allocations to cash seems to bode well for continued liquidity in the asset class.
On the sentiment front, a recent ING Bank survey reveals that investors in Asia (particularly) have become more optimistic about the global economy and a majority of them are especially bullish on their domestic stock markets. The most optimistic investors among the 10 countries surveyed were the Indians, followed closely by the Chinese.
Is it too late to take the plunge?
The strong run in the equity markets since March 2009 has seen Asia (ex Japan) markets rise over 80% [By comparison, the US markets (measured by S&P 500) have risen around 60% and the European markets (measured by DJ Euro Stoxx 50) around 65%] – causing investors to be worried that Asia's recovery is all priced in.
Indeed, the strength and speed of Asia's current rebound has exceeded most other previous recoveries in the last 30 years. However, there are reasons to believe that Asian markets' recovery is still far from having run its course.
Asian bull markets have lasted between 3 and 5 years. Looking back at each of the last 4 bull markets of Asia (ex Japan) from 1974 onwards, and measuring returns over years 1 to 5, the average performance of Asian equities in the years subsequent to the market trough have been as follows:
year 1: 53 per cent,
year 2: 24 per cent,
year 3: 15 per cent,
year 4: 47 per cent and
year 5: 53 per cent.
(Source: Datastream, MSCI, Citi Investment Research).
Going by this track record, the potential for further gains certainly seems likely.
Negotiating the bumps ahead
Although there’s a solid case to be made for the upbeat longer-term outlook for Emerging Asia, the road to recovery (as with most) may not be that smooth sailing.
A key risk is an early monetary tightening (increase in interest rates). In the past, US Federal Reserve tightening has triggered a correction in share markets globally. However, given the importance budding economic powers like India and China, the financial markets may take their cue from those policymakers as well (or better still, instead).
Here the key development to watch is the return of inflation. One consequence of fiscal stimulus and low interest rates is that liquidity has surged and with it, the risk of inflation has come back. For the moment though, China is still experiencing deflation.
Within Asia, emerging countries like India, China and Indonesia appear more favoured by global investors. These countries will see the highest GDP growth in the region this year, with China estimated at 9 per cent, India 6 per cent and Indonesia 4 per cent.
While this is off their recent peak growth rates, the disparity with the rest of the developed world is widening. They have large domestic economies that can be further boosted with aggressive policy action.
Sunil Khemlani
StoneBridge Securities (NZ) Limited
Email: sunil.khemlani@stonebridgegroup.co.nz
StoneBridge Group is an Australian-owned trading house (accredited with the ASX and NZX exchanges) providing advisory and execution services on Foreign Exchange, Commodities, Futures & Options, Shares & CFDs.
This is not an offer to deal in any financial product and is not specific advice for any particular investor. StoneBridge believes that any information or advice (including any recommendation) contained in this publication is accurate when issued but does not warrant its accuracy or reliability, and is not liable for the future performance of transactions or for any loss or damage arising in connection with this publication. A full Disclosure Statement in accordance with the Securities Markets Act 1988 is available free of charge on request. ”
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