Citi Research published a report today written by analyst Johanna Chau explaining why Asia, and in particular China, has not declined as much during the recent emerging markets sell off as it did in the 2013 EM downdraft. Chua’s main thesis is that that the Fed taper is unlikely to have a major impact on China and Asia in general, unlike the quite significant impact it is having on the economies of countries such as Turkey and most of Latin America.
Chua outlines two central concerns regarding EM equities: “EM worries revolve around two interrelated things: 1) vulnerability to less favorable external funding environment; and 2) vulnerability of growth because of the need for current adjustment in order to adapt to the first point.”
No near-term interest rate hikes likely in Asia
The fact that most Asian central banks are not under pressure to increase interest rates over the near term is the key difference. Emerging markets such as Turkey and a number of Latin American countries have already had to ratchet up interest rates, and investors have punished those markets for creating headwinds to economic growth.
The report argues that only a few countries in Asia face the prospect of near-term interest rate increases, and even those countries do not face the same current account issues that Turkey and several other EMs are confronting. “PH (Philippines), MY (Malaysia) and ID (India) are likely to still tighten policy earlier, but the former two have significantly less external imbalances constraining policy choices than TR, and we believe all three have better growth prospects regardless. ID is relatively more similar to TR when it comes to external vulnerabilities, with risks to the negative feedback loop from exchange rate pass thru on inflation, but BI took corrective monetary policy action earlier than CBT and ID’s external financing gap is far smaller than TR.”
Better capital flow structures to deal with Fed taper
Chau also points out that the capital flow structure in most Asian countries is better equipped than other EM areas to deal with the consequences of the taper. “EM Asia not only benefits from having more sizeable CA surplus vs. more common deficits in other non-Mideast EM regions, which reduces its relative exposure to swings in capital flows, but the proportion of net capital flows that are net “portfolio debt” flows is also much smaller in Asia than both Latam and CEEMEA, even among Asia’s “fragile 5” (IN & ID).”