Asian emerging stock markets mirrored the wreckage in global counterparts in 2015, as both the core and frontier MSCI indices fell over 15%, with just four of 50 countries in the positive column and none from the region.

In the main Asia gauge, China rallied toward year-end but was still down 10% and repeated that drop in 2016’s first trading days. India, South Korea and the Philippines slid single digits as the out-performers, while Indonesia, Malaysia and Thailand were off 20% despite December’s launch of ASEAN’s free trade zone.

In the frontier pack, Pakistan, Sri Lanka, and Bangladesh lost 20% on average, as Vietnam, seen as a low-cost labor beneficiary of the complementary Trans-Pacific Partnership with the US, dropped 5%.

In JP Morgan’s external debt index, Indonesia was flat and the Philippines up 3% in dollar terms, while local bonds were battered across the board by currency depreciation.  This year, equities could see a reshuffling of country positions and selective gains, but the overall direction remains gloomy with mediocre economic growth, household and corporate debt overhangs, and China restructuring spillover. Valuation-driven investors may be lured as Asia’s traditional price-earnings ratio premium narrows, but the macro trends are uninspiring and the best bets in 2016 may be in the few places where decisive government action begins to tackle business and financial headaches.

Greater China is a minefield starting the year, and Beijing has again intervened and halted selling as manipulation investigations catch both local and foreign banks and securities firms. The latest actions recalled last summer’s panic after a confusing few months trying to absorb currency changes, including entry into the IMF’s Special Drawing Rights and peg management beyond the dollar against a basket of a dozen developed and emerging market units.

The central bank reported that Yuan balance sheet holdings fell a record $300 billion in November as the Washington-based Institute for International Finance estimated over $500 billion in 2015 capital outflows. Officials pledge exchange rate stability, citing fiscal and trade fundamentals, but monetary policy will stay loose according to the Central Economic Work Conference, and the current account surplus increasingly relies on import compression.

The GDP growth target is 6.8% but it is now hedged by public recognition of industrial overcapacity and bad real estate and local government loans. Even the Beige-Book alternative private sector reading has turned gloomy with its latest survey showing 30% profit decline in manufacturing and services.

Yuan scenarios drifting toward 7/dollar and double-digit earnings losses deter foreign investors both in Shanghai and Hong Kong, where the three-decade old dollar peg was whipsawed by the inaugural US Federal Reserve 25 basis point rate hike and Beijing’s policy moves.

The monetary authority spent heavily in currency defense against normalization and transition “shocks.” Yuan-denominated savings fell 15% and home sales 30% in November, with household debt at an historic high 65% of GDP. Stock exchange sentiment has also been poor in Taiwan, after a 15% MSCI slide in 2015, on the eve of presidential elections where the opposition DPP party is set to triumph. GDP growth is only 1% and the central bank has cut rates to battle deflation as life insurers, the main institutional investors, prefer overseas assets.

India faded as last year’s darling even though 7% consumption-led growth could exceed China’s as economic statistics are under challenge, including inflation measures due to worsen with poor monsoon food output.

Prime Minister Modi has been stymied in parliament on liberalization and modernization proposals, most recently on national tax system introduction and bankruptcy reform. He has hesitated on state-owned banking sector rescue crucial to financing infrastructure, and this year equity enthusiasm will remain muted pending delivery on overdue promises and changes.

Indonesia may gain favor after President Jokowi’s Cabinet reshuffle bringing in business-friendly ministers, and the addition of a coalition partner for a legislative majority. Commodity export prices are still a damper, but such relative improvements can defy the coming year’s low expectations and political and financial system stagnation.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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