Certain about uncertainty

After a disappointing few years for emerging markets and concerns about the success of Abenomics in Japan, Asian markets started 2016 with a mixed outlook. 

China dominated investors’ minds at the beginning of the year with concerns about a potential slowdown in growth (as it rebalances its economy), combined with a slump in commodity prices. 

Meanwhile, the Bank of Japan’s determination to kick-start growth was highlighted in January with its surprise decision to introduce a negative interest rate policy, applying a rate of -0.1 per cent to reserves from February 16. 

This was followed up in September by the decision to introduce yield curve control and cap 10-year government bond yields at near zero per cent. Overall, Japanese GDP growth in 2016 recorded an annualised growth rate of 2.2 per cent to the end of the third quarter, suggesting the unexpected moves have helped to boost growth – at least for the time being. 

China and emerging markets also saw their fortunes improve as the year progressed. The first quarter remained tricky – especially for countries reliant on commodities – but, as the oil price rebounded and fears of a Chinese hard landing retreated, emerging markets started to return to favour. 

 India has become a promising opportunity. Bureaucracy has historically been a hurdle, but that is changing. The government’s move to counter the black market by voiding portions of the currency has given rise to short-term panic, but that has created a buying opportunity on the way to what will, ultimately, be a more bankable economy  Leon Eidelman, fund manager, JPM Emerging Markets fund

For the year to date to November 21, the MSCI Emerging Markets index gained 28.7 per cent in sterling terms, compared with the MSCI World’s rise of 23.9 per cent and the Nikkei 225 index increase of 23 per cent, data from FE Analytics shows. 

Professor Chris Rowley, visiting fellow, Kellogg College, University of Oxford, says: “While the end of 2016 has seen much attention shift to Europe and North America with unexpected and seismic Brexit and Trump victories, Asia remains critical and will be so in 2017 and beyond. UK investors need to be aware of this and not be too distracted by events closer to home, taking their ‘eye off the ball’. 

“This is because it is home to two of the three largest global economies by GDP, and it will contribute 40 per cent of global GDP and nearly two-thirds of global growth in the next few years, according to the International Monetary Fund,” he adds. 

In terms of tailwinds to the region, Professor Rowley highlights the implementation of the Asian Infrastructure Investment Bank to fund regional modernisation and construction, and also China’s ‘One Belt, One Road’ initiative, which is likely to benefit emerging markets in Central and South East Asia.

He continues: “In terms of the Chinese and Japanese economies, the issues are manifold, with some similarities. In China, these include slowing growth and economic restructuring from exports to domestic demand, and from manufacturing and industry to services and consumption – resulting in industrial over-capacity and increasing debt levels along with an opaque banking system. 

“On the horizon is the issue of demographics with an ageing population and falling birth rates, and a UN prediction that over-65s will jump by 85 per cent to 243 million by 2030. Another issue is China’s relationship with Japan, with friction over contested histories and now security and territorial claims. 

“Issues for the Japanese economy stem from growing public debt, one of the world’s most elderly populations and a declining workforce. The population fell by nearly one million in 2010-15. Economic issues remain despite ‘Abenomics’ and the ‘Three Arrows’ reforms. They have missed their targets and been a flop.”

In addition, the final quarter of the year saw further potential headwinds for the region, following Donald Trump’s US election victory, with one of his first policy announcements confirming plans for the US to withdraw from the Trans-Pacific Partnership (TPP). 

Simon Down, senior portfolio manager at Nikko Asset Management, notes: “In Asia, if the TPP is abandoned, the likely winner is China, and Asian nations will pivot towards increasing trade with the country. China was not part of the TPP as the agreement was largely an attempt to counter its growing world influence. China has already indicated that it will use a regional summit in Peru to propose an Asia-Pacific free trade area. 

“However, if the US does shift to a more protectionist stance, the Chinese economy is likely to face severe headwinds, curbing its demand for imports from the rest of Asia. This could, in turn, incentivise Chinese authorities to provide greater fiscal stimulus to boost consumption, as this could be a key moment for China to cement its role in the region.”

Xavier Hovasse, emerging markets fund manager at Carmignac, points out that while uncertainty in Asia – and emerging markets more generally – has increased in the wake of Mr Trump’s election, there is room for optimism. 

“This initial market reaction has been a classic risk-off reaction, partly due to increasing global uncertainty and a rising protectionism premise. The only thing we can be sure about is that everything remains uncertain. On a longer term view, what happened is not necessarily negative for emerging markets as a whole.”

Nyree Stewart is features editor at Investment Adviser