Asian economies didn’t do too badly in 2018, and Asian assets may be a good bet in 2019
- Aidan Yao says the fundamentals of Asian economies are more solid than the market thinks. Although Asian central banks are likely to be cautious next year, Asian assets are more attractive now than they were 12 months ago
This year has been challenging for Asian markets as investors abandoned risky assets amid a strong rebound in the US dollar, rising concerns about growth in China, and escalating trade tensions between the world’s two largest economies. Sharp sell-offs have swept through markets, causing carnage across equities, credits and currencies.
While the region as a whole has outperformed other emerging markets, some countries – with vulnerable external positions, including current account deficits and large external debts – have been hit hard. In the case of Indonesia and India, the sharp plunge in their currencies has forced central banks to raise interest rates to avert the risk of a capital exodus.
This challenging financial backdrop has, however, masked the solid fundamentals of Asian economies. Propelled by internal and external engines, estimated growth in the region (excluding China) has risen to a seven-year high of 5.2 per cent.
Although it is waning at the year end, export growth has been strong this year, thanks to global demand and a tech cycle that has benefited the region’s large tech exporters; the persistence of export growth is particularly impressive after a stellar year like 2017. As output gaps gradually narrow and inflation rises moderately, some central banks – such as Bank of Korea and Monetary Authority of Singapore – have started to gently normalise monetary policy.
One exception is the central bank of the Philippines, which appears to be significantly behind the curve despite rate hikes of 175 basis points over the past year.
Apart from the Philippine central bank, which has to do more to cool its overheating economy, more cautious policy normalisation is expected from Asian central banks as dark clouds gather over the economy in 2019.
Because of slowing global growth and a downturn in the tech cycle, external demand will turn from a tailwind into a headwind, weighing on Asian growth in the year ahead. Not to mention the acute uncertainty from the US-China trade conflict, which could escalate after the 90-day truce.
If the trade war becomes contagious, Asia is expected to bear the brunt of the impact, given the region’s close integration into China’s supply chain. Luckily, the domestic engines of many Asian economies should continue to power ahead and offset external headwinds.
Next year will be an election year for a number of Asian countries, including India, Indonesia and the Philippines, where pre-election spending should boost domestic demand. Resilience in the private sector is likely, as robust labour market conditions prop up consumption, as well as GDP growth. Overall, only a moderate growth slowdown is expected in the region: 5.1 per cent in 2019, followed by 5 per cent in 2020.
On the inflation front, the recent rise in oil and food prices has lifted headline inflation, allowing the consumer price index to move closer, or into, central banks’ target ranges. This price pressure is likely to ease in 2019, as the impact of the oil price movement reverses and slower growth weighs on inflation.
But against this moderately softer backdrop, with a balance of risks tilted to the downside, Asian central banks will proceed with caution. Excepting the Philippines, most central banks are likely to put monetary policy rates on hold, with the Reserve Bank of India, Bank Indonesia and Monetary Authority of Singapore tightening policy in a data-dependent manner.
For financial markets, the significant de-rating of Asian assets this year suggests a lot of bad news has already been priced in. The risk-reward of Asian assets is therefore more attractive now than it was 12 months ago, raising the odds of a sustained market rebound if the current recovery can take hold.
However, investors should not be oblivious to lurking downside risks, such as intensified conflict between the US and China, a sharper slowdown in developed market demand, and a more aggressive US Federal Reserve tightening than what has been priced into the market.
In our assessment of external vulnerability this year, we successfully identified the high-risk markets. Going forward, our rating shows Indonesia, Malaysia, the Philippines and India remain vulnerable to a worsening of global sentiment.
But on the flip side, a turnaround in investor risk appetite could lead to the outperformance of these high-risk nations if 2019 turns out to be a year of redemption for emerging market assets.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers