People are reflected in a display showing market indices outside a brokerage in Tokyo, Japan. REUTERS/Thomas Peter/File Photo
People are reflected in a display showing market indices outside a brokerage in Tokyo, Japan. REUTERS/Thomas Peter/File Photo

Although being down 10 percent in dollar terms on the MSCI Index, Asian stock markets, with the big exception of China’s A shares, were all positive though September, roughly in line with the 15 percent global composite increase.

Indonesia and Pakistan were top core and frontier universe gainers at 25 percent and 16 percent, respectively, as the region lagged Latin America in particular with cases of double those advances. India reversed negative performance and Korea and Malaysia were up 15 percent and 2 percent, respectively, in dollar terms.

Thailand managed its own 25 percent upswing on constitutional changes, while political transition hurt the Philippines as foreign investor outflows accompanied President Duterte’s erratic debut.

Fund flow data continue to show a large US$20 billion net exodus from Asia due mainly to Chinese financial system and enterprise restructuring fears, but doubts also linger about neighbors’ leadership and economic policy direction that may resurface toward end-year as industrial world central bank liquidity lift is not as pronounced.

Chinese equities were unmoved by GDP growth on track toward the 6.5 percent target, and currency stability ahead of October’s IMF Special Drawing Right entry. The Fund in a separate report pressed the urgency of commercial and shadow bank overhaul against the backdrop of “uncertain” economic transformation.

The government created a US$50 billion state firm reorganization fund to spur halting efforts, but allowed use for new overseas acquisitions as outward direct investment was US$10 billion more than 2015’s US$135 billion FDI total.

The private sector Beige Book survey of thousands of smaller businesses revealed a retail sales and services slump as rebalancing is emphasized away from fixed investment and exports. Steel industry overcapacity was marginally reduced, honoring a pledge at September’s G-20 summit, with companies defaulting on and swapping existing bonds in the process.

Real estate is also experiencing a glut according to experts, but half of bank credit, still expanding at a near 15 percent annual clip, is now for mortgages, enabling a sudden home price rebound in 65 out of 70 cities.

Record liquidity

Policy banks received injections to support infrastructure projects that no longer attract normal funding, and local governments are again borrowing heavily with previous limits ignored. The central bank in its own form of quantitative easing continued to add record liquidity through repo operations, but ratings agencies and investment houses note it is trapped as the true bad loan level currently stands at 15-20 % of portfolios. They believe recapitalization is long overdue for the giant state lenders to cover the hole, and are not keen on Shanghai or Hong Kong offerings, as evidenced by Postal Bank’s lackluster debut on the latter exchange in September despite its US$7.5 billion size as this year’s leader.

India moved from midyear loss to a 6 percent advance with foreign investor allocation at US$7 billion, almost double 2015’s third quarter figure, despite the steep average price/earnings ratio approaching 20 times. September’s US$900 million flotation by insurer ICICI Prudential Life was the biggest in years, and oversubscribed tenfold as the sector further opens to international ownership.

The appointment of new central bank governor Urjit Patel and monetary policy committee members has gone smoothly, and they may soon cut interest rates with consumer inflation down to 5 percent. Reported 7 percent GDP growth outpaces China’s, and the current account deficit is under control. National goods and services tax victory revived the structural reform agenda, although closing the offshore Mauritius loophole will impose capital gains levies on short-term investment for the first time.

Indonesia has been the big economy favorite in 2016 after President Widodo’s early stumbles, as he installed business-friendly ministers and championed consecutive infrastructure and anti-bureaucratic initiatives. Finance Minister Sri Mulyani is back in the chair to oversee a tax amnesty program which has so far brought in one-quarter the US$40 billion target. Second quarter growth was 5 percent on solid consumption, but bank credit was only up single-digits and longtime mining partners like Newmont will exit on royalty and regulatory concerns.

Philippines stocks in contrast sold off in September to pare their year-to-date MSCI index increase to 6 percent, as President Duterte lashed out at political and economic critics, with the region on notice to revisit policy coherence or enthusiasm could fade with the liquidity tide.