After a tough, volatile 2015, Asian equity and debt markets could begin to recover their balance toward the end of the new year.
Asia’s emerging markets should begin 2016 under the same cloud that a slowing Chinese economy and a rallying U.S. dollar consigned them to for much of 2015, but analysts see a chance of scattered sunshine during the second half.
For some observers, that’s a matter of battered Asian markets being able to aspire, as the year progresses, to “least ugly” status, relative to the diminished returns they expect from other major markets.
“The bar for relative performance has lowered significantly,” said Timothy Moe, Hong Kong-based chief Asia-Pacific equity strategist with Goldman Sachs (Asia) LLC, at a Dec. 10 briefing on the market opportunities his firm anticipates for the coming year.
Goldman Sachs expects tepid real U.S. dollar earnings per share gains of roughly 5% for the MSCI Asia Pacific ex-Japan index in 2016, better than almost-flat returns for key U.S. and European equity benchmarks, noted Mr. Moe. Against that backdrop, it’s possible to “paint a picture where emerging markets performance can find a floor,” even if stock pickers will be needed to separate the wheat from the chaff, he said.
Goldman Sachs will start the year “more cautious on emerging markets than developed markets, but in the second half” — in light of the considerable declines emerging Asia’s stock markets and currencies have endured over the past year — those markets should be able to stabilize and “maybe pick up,” predicted Mr. Moe.
For the current year through mid-December, key equity benchmarks in Singapore, Thailand, Indonesia and Taiwan have suffered double-digit declines, while Hong Kong, India, Malaysia, Australia and the Philippines have dropped between 4% and 8%. North Asia’s bigger markets dodged the bear bullet, with Japan up 11%, the Shanghai composite up 10.7% — although down 30% from the midyear high — and South Korea up 3%.
Local currencies have lost ground against the dollar as well, led by double-digit declines for Malaysia, Indonesia, Australia and Thailand.
Emerging markets debt should likewise garner more interest in the second half of 2016, after a 2015 where Asian paper held up relatively well compared to bonds from emerging markets in Latin America and the Europe-Middle East-Africa area, said Arthur Lau, Hong Kong-based co-head of emerging markets fixed income and head of Asia ex-Japan fixed income with Pinebridge Investments.
There’ll be continued challenges as China slows and the dollar strengthens further, agreed Rajeev De Mello, Singapore-based head of Asian fixed income with Schroder Investment Management (Singapore) Ltd. But once local debt has priced in the rest of the year’s U.S. Federal Reserve’s interest rate hikes, probably between the first and second quarter, the significant outflows from U.S.-based investors since the Taper Tantrum in May 2013 should “start to reverse,” he predicted.
Equity-focused players remain a bit more tentative regarding the balance of regional pros and cons for the new year.
“What’s holding us back is the credit situation,” said Al Clark, Sydney-based global head of multiasset with Nikko Asset Management Australia Ltd. He cited concerns about the ability of governments and companies in the region to service the heavy debt loads taken on following the global financial crisis, while being squeezed by a combination of decelerating economic growth and the impact of a rising dollar.
If not for that, said Mr. Clark, there are a lot of good reasons to add Asian equities to a portfolio now. Structural reforms, an area where Asia stands out globally, fiscal reforms and the stimulative impact of lower commodity prices amount to a “hell of a lot of positives” for the region’s macro picture, he said.
Still, most equity observers predict it will take another six months or so for investors to overcome their concerns, and then they are likely to proceed selectively — with countries leading the reform pack, such as China, India and Indonesia, at the front of the receiving line.
Additional U.S. interest rate rises should leave the greenback on a strengthening trend during the first half of 2016, but emerging market currencies are nearing the point where they’re getting cheap, noted Ewen Cameron Watt, London-based global chief investment strategist with the BlackRock Investment Institute, at a recent presentation on BlackRock’s 2016 market outlook.
Patrick Mange, London-based emerging markets strategist with BNP Paribas Investment Partners, said while there are “still a lot of clouds” on the horizon for emerging markets, “the bulk of dollar appreciation is behind us,” setting the stage for a pickup in opportunities there for debt as well as equity toward the end of 2016.
Some analysts say the growing strength of consumers in a region long known for its powerhouse exporters could provide a growing number of opportunities for money managers in 2016.
For example, against the backdrop of China’s big push to shift its economy from being “manufacturer to the world” to relying more on domestic consumption for growth, the renminbi’s depreciation this year has had a dramatic effect on the local mindset that will “very much benefit our industry,” noted Mark te Riele, London-based global head of marketing, Asia-Pacific and emerging markets, with BNP Paribas Investment Partners.
After years where the renminbi appreciated steadily, the realization that currency valuations are a two-way street has boosted interest in diversifying offshore, becoming “a strong driver for our business,” said Mr. te Riele. The same trend is occurring now in other key markets, including India and Indonesia, he added.
Helped by regulatory reforms, “I think we will see next year a further increase of these markets investing abroad,” he said.
Still, the persistent deceleration of China’s once white-hot economic growth of 10% or more a year will continue to weigh on the growth of the countries in the region that supply the mainland’s economic juggernaut with parts and materials.
According to data from Goldman Sachs, a one-percentage-point decline in China’s growth rate will shave 30 basis points from the growth of that country’s biggest suppliers in the region, including Hong Kong, Taiwan and the countries of Southeast Asia. The firm predicts China’s growth will slow to 6.4% in 2016 from 6.9% in 2015.
But bigger countries with low exports-to-GDP ratios such as India, Indonesia and the Philippines are less vulnerable. Goldman Sachs predicts those countries will be able to post relatively strong growth in the next five to 10 years, if supported by investment-friendly policies.
BNP Paribas’ Mr. Mange said improvements in fiscal strength, helped by the plunge in prices for commodities, are opening the way for countries such as Indonesia to make significant investments in infrastructure — the kind of decisions that could create a “virtuous circle” for that giant country’s economy.