InvestmentsFeb 29 2016

Asian crisis gone but not forgotten

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Asian crisis gone but not forgotten

Look at any prolonged period of market volatility in Asia, and one of the many questions that spring to mind is whether it is a repeat of the 1997-98 Asian financial crisis.

That crisis began when the Thai currency collapsed, spreading contagion and hitting countries including Indonesia, South Korea, Malaysia and the Philippines. Almost 20 years on, as we work through a Chinese slowdown and its implications for Asian economies, has the region learned lessons from the past?

Andrew Swan, managing director and head of Asian fundamental equities at BlackRock, suggests the region is in a far better place than 20 years ago, with “more flexible foreign exchange regimes, quicker adjustments to current accounts, balanced corporate attitudes to foreign debt and, importantly, less hubris”.

He adds: “There is a transition under way, with Asia moving from an old model built on exports to developed markets, to a more self-sustaining and domestic model. There has been genuine progress in countries such as the Philippines.”

Paul Danes, manager of the Martin Currie Asia Unconstrained Trust, agrees the removal of fixed exchange rates “means adjustments are less dramatic; current accounts and reserves are also in better shape”.

But that doesn’t mean there are no risks: “Exchange rate risk remains the biggest wild card in Asia. As rates diverge, there is a small but serious risk that portfolio flows, especially from the fixed income market, could cause significant dislocations in exchange rates.

“Malaysia and Indonesia are both in a relatively weak position. Of all the Asean countries, Indonesia has probably done the least over the past 20 years to reform and enhance its long-term position,” he explains. “The star is the Philippines. This is partly because it has favourable demographic trends and partly because the exchange-rate risk is mitigated by remittances from overseas workers. The problem is that the Philippines is the most expensive market in Asean.”

ASIAN MARKETS

Newton’s Rob Marshall-Lee on key Asian market opportunities:

China

We expect a lower growth rate in China, yet there are many attractive investment cases, such as companies within the e-commerce and healthcare sectors. We are conscious of the debt excesses that have built up and, while we do not expect a crisis, we do see companies exposed to these areas as highly vulnerable and, hence, value traps.

India

India is our preferred emerging market for the next five years. It is one of the few markets in the world where we see strong multi-year growth potential, underpinned by structural growth factors. While an appealing improvement story is under way, the market has become frustrated at the pace of change during 2015.

Philippines

The Philippines has elections in the first half of this year, and the right candidate will be important in ensuring continuity of investment and reform-driven growth. The positive population demographics and early credit-cycle factors remain attractive and have all been conducive to the strong GDP performance.

But while governments made changes in the wake of the last crisis, Rob Marshall-Lee, head of Asia and emerging markets at Newton Investment Management, warns the “flood of international money into the region in recent years has made it vulnerable to the vagaries of foreigners who are quick to move their money in times of turmoil”.

In 2015, he notes the Indonesian rupiah and the Malaysian ringgit fell to their lowest levels against the dollar in nearly two decades.

“Substantial international investment in some Asian government bond markets, notably Indonesia and Malaysia, makes them sensitive to how investors perceive their financial health,” explains Mr Marshall-Lee. “If the dollar’s resurgence continues and Asian currencies weaken, investors could pull money from these markets pushing borrowing costs higher. At the very least, this would preclude any interest rate cuts.”

But Peter Sengelmann, senior portfolio manager, emerging market and Asian debt at NN Investment Partners, suggests Malaysia has already demonstrated its resilience.

“In 1997, the government reacted to the 50 per cent decline of the ringgit’s value by imposing capital controls and introducing a 3.80 peg against the US dollar. This time, Malaysia’s reserves meant it did not have to interfere with capital flows and financial markets.”

THE CHINA CHALLENGE

With China’s economy continuing to slow as it transitions, how much of an impact could it have? Richard Jones, portfolio manager, First State Stewart Asia, explains:

“China has an ability to confront any crisis in a way that was not available to the relatively small and open Asean countries last time around. Foreign debt is not a general problem in China, relative to the size of the economy, while decisions about the re-capitalisation of institutions will probably be more easily done, if they are required.

“On the other hand, the constant meddling with some of the market-clearing mechanisms at the heart of capital allocation, means share price attrition, economic collateral damage and general antipathy may be with us for quite some time.”

Indonesia also has potential opportunities, according to Daniel Tubbs, head of global emerging markets at Mirabaud Asset Management. He notes the economy expanded by 4.8 per cent in 2015 and growth is expected to accelerate to more than 5 per cent in 2016.

“Inflation has moderated to 4 per cent and the central bank has started to cut interest rates. Meanwhile, the government has announced an economic stimulus package focused on promoting foreign direct investment and fixed asset investment. Growth is now increasingly being driven by consumption and investment,” he explains.

“The pick-up in growth and relative political stability have increased the chances of a rating upgrade by S&P.”

While there are issues emanating from China’s transition, the source of the last crisis and the contagion that followed looks unlikely to repeat itself.

Jason Pang, portfolio manager Asian fixed income at Axa Investment Managers, concludes: “Two decades ago, the Asian financial crisis was driven by hot money inflows, public and private sector debt, poor fundamental metrics and current account deficits. Policymakers took this lesson to heart and the region has been relatively resilient.”

Nyree Stewart is features editor at Investment Adviser