Risks and rewards: a guide to trading in major Asian markets this year

SINGAPORE/BANGKOK — Asia was the place to be for emerging-market investors in 2017, but a slew of issues and events risk standing in the way of the region repeating that world-beating performance.

From Donald Trump’s approach to trade to North Korea’s saber rattling and China’s ongoing quest to cut debt — there’s no shortage of potential threats to what analysts and investors say should be another banner year for stocks and currencies in Asia’s developing markets.

“Looking at the emerging markets, Asia is in a relatively better position due to its firm fundamentals,” said Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo.

“Risk sentiment is still quite strong but investors may need to be a bit more cautious in the latter part of the year.”

The MSCI EM Asia Index soared 40% in 2017, beating the 34% surge in the MSCI Emerging Markets Index.

South Korea’s won led gains among Asian currencies and all but Indonesia’s rupiah and the Philippine peso strengthened.

Ten-year bonds in Indonesia, Malaysia and Thailand also had a good year, while those in China, India and South Korea fell.

How will things pan out in 2018? Here’s what to watch out for market by market:

PHILIPPINES

Economists predict the Philippines will continue to see the fastest growth in Southeast Asia this year, with contributions especially from the government’s infrastructure push.

The enactment of a tax reform program will help fund that drive, while personal income tax cuts should boost consumption.

Nevertheless, the economy runs the risk of overheating and the government’s “Build Build Build” program

could exacerbate the trade deficit and keep weakening pressure on the peso, according to Sanjay Mathur, chief economist for ASEAN and India at Australia & New Zealand Banking Group Ltd. in Singapore.

CHINA

Beijing greeted the new year with fresh measures in its offensive against debt, introducing new curbs on leveraged trading in the bond market and zeroing in on small banks’ reliance on short-term debt. The campaign contributed to a surge in 10-year government bond yields to a three-year high late last year.

China’s central bank is also said to have tweaked its management of the yuan’s daily fixing, leaving it more open to market forces.

Trade friction with the US remains on investors’ radars. The Department of Commerce has to decide whether to recommend slapping tariffs on steel and aluminum imports on national security grounds — aimed at China in mid-January.

Some mainland Chinese stocks will be included in MSCI Inc.’s indexes from May, and China could be included in at least one of the world’s three major bond indexes.

SOUTH KOREA

Tensions with North Korea have eased amid talks between the two nations, with plans for Pyongyang to send a delegation to the Winter Olympics in South Korea next month.

Still, a potential currency fight is brewing with Seoul warning about gains in the won, Asia’s best- performing currency in 2017. That’s reignited concerns over possible currency intervention on the part of Korean policy makers to shield export growth.

Likewise, ongoing negotiations with the US over a free-trade agreement will also be a must watch given South Korea’s dependence on overseas shipments.

INDIA

Surging oil prices pose the biggest risk to Asia’s third-biggest economy as it may add to already fast inflation and widen the government’s budget deficit, given India is a net crude importer.

At the same time, the promise of faster economic growth, backed by political stability under the leadership of Prime Minister Narendra Modi, is likely to continue to burnish the appeal of Indian assets. — Bloomberg