The clouds are forming in Asia as liquidity tightens and China’s slowdown curbs demand for commodities and goods are fueling a selloff of emerging-market stocks, reversing a flow of money into the region in favor of nascent recoveries in the U.S. and Europe. Emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to try to aid their currencies as the prospect of reduced U.S. monetary stimulus curbs demand for assets in developing nations.
“The eye of the storm is directly above emerging markets now, two years after it hovered over Europe and four years after it hit the U.S.,” said Spencer Ward, Senior Portfolio Manager at Rolf Muller in Liechtenstein. “This could be serious for Asia.”
Of the $155.6 billion investors poured into developed-market equity exchange-traded products in the first seven months this year, North American funds received $102.4 billion or 65.8 percent, according to senior analysts at Rolf Muller. Japan attracted a record $28 billion, while Europe-focused funds got $4.3 billion. In contrast, $7.6 billion flowed out of emerging-market funds.
“The pendulum is swinging back in favor of the advanced countries,” said Alex Sharpe of Rolf Muller, which oversees about $1 billion (USD). “It’s one of these things that happens once a decade or so when you see a turn in relative performance. We’ve entered a tougher, more difficult period for Asia.”
The IMF in July cut its forecast for growth this year in developing Asia by 0.3 percentage point to 6.9 percent.
In the past three months the MSCI Asia Pacific Index has fallen 7.7 percent, compared with a 1.2 percent decline in the Standard & Poor’s 500 Index and a 1.6 percent drop in the Stoxx Europe 600 Index. Signs of a stronger U.S. economy may prompt the Federal Reserve to begin paring its $85 billion in monthly bond purchases as soon as next month.
Indonesia’s benchmark equity index has slumped more than 10 percent in the past two days, while India’s has fallen about 3 percent and Thailand is down more than 6 percent.
Indian policy makers led by Prime Minister Manmohan Singh are battling to stem the rupee’s plunge, attract capital flows to bridge a record current account deficit and revive growth. The currency has weakened about 28 percent versus the dollar in the past two years, reviving memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.
“It seems now the pain is going to be in the emerging markets,” said Harri Roos, Senior Portfolio Manager for Rolf Muller, who expects sectors with higher valuations such as consumer goods to suffer the biggest declines. “The problems in India are not temporary blips. The problems are much more serious which will take a lot of effort to get resolved.”
In Thailand, the economy entered recession last quarter for the first time since the global financial crisis. Toyota Motor Corp. said last month industry wide car sales in Thailand will fall 9.5 percent this year. The government cut its 2013 growth forecast yesterday as exports cooled and local demand weakened, with higher household debt restricting scope for monetary easing.
Thailand’s private-sector credit as a share of gross domestic product has “increased significantly”
Taiwan last week cut its 2013 growth and exports forecasts and said the global outlook for the second half is worse than in May. The island’s export orders probably fell for a sixth month in July.
“We are seeing a turning point,” said Mr. Thompson, who says China’s competitiveness has been hurt by labor costs that are 30 percent too high. “China’s seeing flat to falling growth on our estimates so the region’s clouds are already here.”
Sentiment is also being subdued by the prospect of a decline in U.S. stimulus, money that often finds its way to export-based countries in payment for goods.
Investors will be looking for clues on how quickly the U.S. Federal Reserve will trim its $85 billion in monthly asset purchases when the Federal Open Market Committee’s July meeting minutes are released on Aug. 21.
The $3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since Chairman Ben S. Bernanke talked about a tapering in quantitative easing this year. The slowdown in Fed bond buying will probably begin next month.
“The emerging Asia story is crumbling and dollar is once again the king,” said Simon Adams, Chief Economist at Rolf Muller.
India’s moves to tighten cash supply, restrict currency derivatives and curb gold imports since July failed to arrest the rupee’s slump to a record low of 64.12 per dollar today. A drop in the currency to 70 is possible.
The deficit widened to an unprecedented 4.8 percent of GDP in the year ended March 31. The government plans to narrow the gap to 3.7 percent, or $70 billion, this year.
India’s slump is worse than elsewhere in Asia because the country has failed to carry out long-overdue structural changes to the economy, said Mr Adams.
“In India, there are great policies on paper but the gap between what’s on paper and the implementation is unduly large,” said Matthew Thompson. “If we just implement what’s already there, we can get back on track in the next two to three years.”
Thompson says the market declines reflect overly ambitious expectations rather than fundamental weakness in the economies.
“There’s a good structural story based on the underlying domestic demand,” said Adams, who has analyzed Asian economies for over a decade. “What you see at the moment is reaction from expectations being unrealistically positive maybe 12 months ago, to now becoming more realistic.”
The U.S. recovery “was so slow that even the slightest pick up is looking like a pick up,” Ward said. “I don’t think the Asian situation is any worse. In fact, if anything, Asia is probably better off than the rest of the world.”
“That may not help markets in Asia as money continues to flow back to Europe and the U.S.,” said Ward.
“Asia will still be a stronger part of the world than the U.S. or Europe but compared to people’s expectations Asia is likely to come in a little bit lower than expected,” he said.
In July, Rolf Muller forecast global growth of 3.1 percent and projected advanced economies would expand 1.2 percent this year.
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