Strong market rebound for emerging Asia?
THERE is a view that emerging markets may stage a rebound that is more powerful than that of the US, which has seen weakening economic numbers lately in a situation compounded by Trump politics.
“Funds are flowing into emerging markets following a slowdown in the US economy; its first quarter gross domestic product (GDP) growth was just 0.7%.
“Typically, after a recession when US GDP is still slow, funds flood emerging markets, in search of rebounds that are more powerful than that in the US.
“The current development is a throwback to that kind of situation,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.
“Sluggish US GDP growth at the start of the year is not unusual. This includes the effect from bad weather.
“The US economy is firmly on the recovery path, supported by strong job creation, low inflation and healthier household balance sheets.
“The continued bullishness of emerging markets coincides with the current softening of the US dollar, which has a positive impact on their equities and currencies,’’ said Lee Heng Guie, executive director, Socio Economic Research Center.
Emerging markets, which should be supported by steady economic fundamentals and better corporate earnings, will continue to perform as long as US interest rate hikes are gradual and well-managed.
“It is only aggressive US rate hikes that would lead to emergingmarkets underperforming relative to developed markets,’’ said Lee.
“Emerging markets will likely outperform but looking at the recent economic numbers from China, markets will likely have to drop first in the second half,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful.
“Negative surprises or shocks from China will spill over to emerging markets via trade and financial channels. China is a major trading partner of emerging economies.
“Worries about China’s economic health and financial stability could cause volatility in the yuan,’’ said Lee.
“China’s consumption of commodities, which are often supplied by emerging markets, is a major driver of their price gains.
“The full extent of the weakness in China’s economic numbers have yet to unfold and China observers are divided in their opinions.
“China is a very large economy. Weakness in one area may be offset by strength in others.
“It may take years for any predicted slump to unfold.
“In any case, the reliability and representativeness of such weakening data is uncer- tain,’’ said Pong.
Will Trump politics put a dampener on the emerging markets rally? “It depends on whether the investigation (on reports that President
Donald Trump had asked ex-FBI director James Comey to drop a probe into former National Security Advisor Michael Flynn’s links with
Russia) will deepen and whether US markets will fall further,’’ said Eng.
“It is too early to tell. Sentiment is affected by the latest Trump drama,’’ said Wong, adding that emerging markets and specifically,
Malaysia, will continue to attract inflows from the US.
An upside surprise in the first quarter GDP growth number – 5.6% against expectations for 4.8% – upbeat corporate earnings, cheap currency, relatively low foreign holdings in equities and government bonds as well as an election theme would be strong catalysts for Bursa Malaysia, said Wong.
“My opinion is that an impeachment (for Trump) is unlikely, so this issue has only a fleeting impact on the US market,’’ said Pong.
Asia benefits from the world’s fastest economic growth, and may be poised to weather the latest international political worries from outside the region as well, said Bloomberg.
Emerging and developing Asian economies are poised to expand 6.4% this year, compared with a global growth of 3.5% and just 2% for advanced economies, according to the International Monetary Fund.
“Fundamentals in Asia are better than other emerging markets,” Takahide Irimura, an economist with Mitsubishi UFJ Kokusai Asset Management Co, was quoted as saying. That may help explain why “Asia seems to be less hit by the risk-aversion and sell-offs this time.”
What’s hurt Asian assets most in recent years has been the risk of more aggressive US monetary tightening and worries about a hard landing in China, along with lack of clarity over Chinese policy shifts, said Bloomberg.
For now, China concerns are limited, thanks to what policy makers there signal is a measured campaign to contain leverage.
As for the Federal Reserve, there’s little indication it’s about to step up interest-rate hikes after a softer run of economic data, added Bloomberg.
The recent run-up in Asian stocks means there may be further scope fora pull-back, Nader Naeimi, head of a dynamic investment fund at AMP
Capital Investors in Sydney, was quoted as saying. “If markets fall further, we will be looking to get back in slowly.”
However, a softer US dollar may be a risk to Asian growth in the form of less competitive exchange rates. Even so, a recent upturn in global trade offers some tailwinds to the region, said Bloomberg, adding that it also gives Chinese policy makers further space to focus on domestic reforms without the increasing pressure of capital outflows.