Foreign Funds Flowing Out Of Asian Markets

The reaction to the US Fed’s announcements on weaning the global economies off quantitative easing measures has been swift and sharp, with foreign investors stepping back from the emerging Asian economies. Worryingly, China’s factory numbers and import and export numbers also came in lower than expected.

Vikas Gattani is a seasoned financial industry veteran with over twenty-two years of experience in trading and investment management in the Asia Pacific financial markets. He was formerly CIO of the internal hedge fund group of JP Morgan Asia and has also run the Asian Investments group at Merrill Lynch, Hong Kong. Vikas is the founder and CEO of Progress Capital, a multi-family office run out of Singapore, which manages assets for ultra-high net worth individuals. 

The idea of this article is to provide fortnightly investment/financial market-related news/views in high growth Asia Pacific markets excluding India. It is intended to provide information and eventual investment opportunities for readers of DSIJ who would like to diversify their investment horizon outside of India.

Myanmar’s opposition leader Aung San Suu Kyi has announced that she intends to run for president in the elections two years from now, and fended off criticism about not reacting to the repression of the Muslim minority. The country’s President Thein Sein has given an assurance that the government would continue efforts to open the country after about five decades of military rule. The constitution automatically grants the military a quarter of seats in parliament. Since amendments need more than 75 per cent of votes to be passed, the military can effectively veto any changes.

Indonesia’s main opposition party, PDI-P, led by former President Megawati Soekarnoputri, has lost a parliament vote to block approval of the revised 2013 state budget which paves the way to raise the prices of subsidised fuel. Increasing fuel prices would improve investor confidence in the economy after the shortfalls made the rupiah Asia’s worst performing currency after the Japanese yen over the past year. However, this will also add to inflationary pressure and may boost inflation to over seven per cent, according to the government’s expectations.

In Vietnam, regulators will submit a proposal next month to ease the restrictions on foreign ownership in companies and raise the limit for publicly traded companies from the existing 49 per cent, as they lure more international investors to a stock market that is 14 times smaller than Singapore’s. Regulators see foreign investment as one key to the stock market’s growth, as the biggest year-to-date stock purchases by international investors since 2008 made the benchmark VN Index southeast Asia’s best performer. The proposal will also consider allowing foreign investors to buy non-voting shares.

In economic news, Bank Indonesia increased the deposit facility rate (Fasbi) by 25 bps to 4.25 per cent in an attempt to maintain stability after the rupiah weakened and to ensure liquidity in the market. The bank raised its interest rate to six per cent, a 25 bps increase.
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A gauge of China’s factory activity fell to a nine-month low in June, heightening risks of a slowdown in growth in the second quarter. After a reading of 49.2 in May, the flash HSBC Purchasing Managers’ Index dropped to 48.3 in June 2013, moving further away from the 50-point mark which demarcates expansion from contraction. China’s trade balance came in at USD 20.4 billion in May (against the forecast USD 16.4 billion). Both export and import numbers were lower than expected.

Almost all asset classes in emerging economies, but particularly the Asian markets, have been rattled since the beginning of June over US Fed Chairman Ben Bernanke’s statement on likely tapering off of quantitative easing (QE) by the end of the fourth quarter this year on the back of a strengthening US economy. A slowing Chinese economy, especially the manufacturing sector and weakening trade data from all Asian economies, has further aggravated the markets.

The equity markets have seen substantial foreign fund outflows, with redemptions in the Asian markets to the extent of about USD 9.3 billion (as of June 21). The likely rise in US interest rates on account of the end of a substantially accommodative monetary policy is leading to fund outflows from emerging markets and into the US market, which is a perceived safe haven and is liquid. This is also resulting in severe currency pressures on emerging market currencies, especially those of countries like India, Indonesia, Brazil, Mexico, etc. which have high current account deficits. Indonesia is taking some strong steps by cutting down on fuel subsidies which would result in some pressure eased off its currency and help bridge some of its trade and current account deficits.

The Indian rupee is in for more troubling times, given Indian consumers’ penchant for gold, a weak government balance sheet and the risk of substantial reversal of foreign fund flows. India has attracted significant flows since 2008 in the space of private equity, real estate and bond markets on the back of the country’s long-term attractiveness, opening up of the economy and its relative insulation from the global macroeconomic crisis. These fund inflows are now at a risk of reversal, especially after generating poor returns on a USD basis.

There has been severe turmoil in the fixed income markets given the decade long rally the markets have seen worldwide. Combined with the high degree of leverage in fixed income, global asset classes are at a risk of sharp sell-offs at any point of time as the US economy gathers more strength and the easy monetary stance gets scaled back. But this will only create buying opportunity for the equity markets in Asia, since the underlying factors continue to provide support for growth here. Besides, institutional flows from bonds to equities will also help support equities on any major sell-offs.

This author has expressed his bearish views on gold in earlier articles, and continues to maintain this stand. As a rising interest rate scenario unfolds in the US markets, gold as an asset class will lose its appeal globally. Thus, the author sees gold prices going down to USD 1200/oz and then to USD 800/oz over a few months or so. Of course, gold will continue to remain an attractive asset class for Indians given that it is a hedge against a falling rupee more than that against inflation. The yellow metal should be viewed in that context here.