The US-China trade war has entered a new, darker phase. Photo: iStock
The US-China trade war has entered a new, darker phase. Photo: iStock

Asian emerging equity markets were down 7% compared with the 9% overall decline on the MSCI core index through September, as Europe, Latin America and the companion frontier gauge fell further. Only Taiwan was positive with a 2% bump, although India, Malaysia and Thailand were close with barely negative readings.

China “A” shares, Indonesia, South Korea, Pakistan and the Philippines lagged with 10-20% losses, and Bangladesh also dropped by double digits on the frontier gauge. The twin benchmarks had few winners, and Argentina and Turkey as crisis epicenters during the period were at the bottom with 50% selloffs.

According to fund trackers like EPFR and the Institute for International Finance, chronic foreign-investor outflows, often fueled by exchange-traded funds (ETFs), which are one-quarter of the total, brought net allocation below US$20 billion year to date, less than half 2017’s sum.

Local bond market performance mirrored stocks, even though mutual-fund commitments to the debt asset class were higher.

Asian currencies slid against the US dollar, while the International Monetary Fund maintained its regional economic growth forecast at 6% through 2019 despite festering trade and financial imbroglios with the US. Toward the end of the quarter, money managers were particularly wary of current-account deficits in India, Indonesia and the Philippines, and possible domestic and overseas private debt overhangs that government fiscal and monetary tools may not readily overcome.

China’s yuan down 4%

China’s official purchasing managers’ index was just over 50 in September, with export orders at a two-year low as so-called Phase III tariffs on almost all US shipments are set. The move on its own would cut gross domestic product growth by 1 percentage point, but JPMorgan predicts offsetting currency depreciation and project and credit stimulus as a complete counter.

The yuan depreciated 4% versus the dollar over the quarter for a 9% six-month slide. Its share of global foreign-exchange reserves remains small at 2% according to the IMF, while the central bank indicated it would maintain an independent monetary policy despite interest-rate increases by the US Federal Reserve. The People’s Bank of China signed a memorandum with the Hong Kong Monetary Authority to drain offshore liquidity better, but Moody’s Ratings does not anticipate large-scale intervention.

The rater has a stable banking-sector outlook for the coming year under a baseline 6-6.5% growth scenario, as it prepares for further international competition under recent opening gambits to quell Brussels’ and Washington’s access anger. However, the Chinese Finance Ministry revealed local-government debt outstanding in August at $2.5 trillion, approaching one-fifth of GDP, and Beijing reportedly directed state media to play down risks from this exposure.

The household debt/output ratio in turn soared to 50% in 2017, global insurer Allianz calculated. The central and provincial governments plan to issue 750 billion yuan ($109 billion) in special infrastructure-project bonds to fight export drag, which will add to the load that a new nationwide system is designed to track.

Against this backdrop, domestic investors who account for 85% of trading have proved more skittish than their foreign counterparts, preferring to buy through the Hong Kong Stock Connects to Shanghai and Shenzhen. With the debt-trade blowups, neither category was swayed by the news that the FTSE index will increase its mainland share weighting to 5% in incremental stages through the end of the decade.

Rupee, rupiah hit record lows

India and Indonesia were trouble spots as currencies reached record lows against the dollar with energy-driven external payments imbalances, and authorities responded with interest-rate increases and import curbs. Incumbents Prime Minister Narendra Modi and President Joko Widodo head into elections next year with respective 8% and 5% GDP growth, but doubts about investor-friendly policies despite a raft of nominal liberalization and streamlining measures.

Indian company earnings continued to advance at a more than 10% annual clip to support high valuations, but intertwined property and financial industry woes were illustrated by a major non-bank-lender debt default, which punctured bullish sentiment. The government sent mixed signals in partially removing restrictions on overseas participation in local and rupee-denominated bonds abroad, while at the same time cracking down on tax and operating advantages of expatriate Indian fund vehicles.

Jakarta will review public investment spending with the intent of shifting ownership and management to the private sector, while pressuring international hydrocarbons operators to keep business at home with state giant Pertamina. Along with resolving conflicting approaches, it must also handle natural disasters near the upcoming IMF-World Bank meetings in Bali to magnify investor anxiety.

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.