Seeking out Asia’s white swans

Doom and gloom seems to pervade most views of Asia’s markets in 2016. So FinanceAsia has sought out some potential positives for the coming year.

Happy times aren’t here again. The beginning of 2016 has been pretty dismal so far, at least from a financial markets perspective. China’s 7% stock market sell-off triggered a domino of similar falls across the world, while market commentators and analysts are queuing to offer their grim views about the country’s economic outlook.

Elsewhere in Asia, the news doesn’t look much better. Japan may have revised its third quarter GDP rate from an annualised drop of 0.8% to growth of 1%, but it remains a heavily indebted economy with little prospect of anything except debt-led growth. And with debt to GDP hitting 250%, this well of liquidity is likely to dry up sooner rather than later.

Add into this soft commodity prices, Middle Eastern tensions on the rise, and even softer US industrial statistics, and plenty of concerns exist to excite market cynics. The black swans are flocking.

Indeed, against the gamut of grim outlooks it is becoming difficult to find white swans. However, we offer a few that will hopefully emerge in the year to come.

China liberalises faster and further

Xi Jinping

The received wisdom is that president Xi Jinping is overseeing China’s slow shift from factory to shopping lines, but doing so at a snail’s pace to minimise the pain on existing industrial stalwarts (many of which are state-owned and politically connected).

However, when combined with entrenched patronage and corruption, capital is continuing to be allocated to the wrong sectors, leaving the slowing economy with large question marks over its sustainability.

Yet lamenting onlookers risk forgetting a key strength of China: the ability of Beijing to conduct rapid and large-scale changes once it makes up its mind. And Xi and his cohorts are well aware that the legitimacy of the Communist Party is intrinsically linked to the wellbeing and contentment of the people they rule.

With the economy struggling to maintain once-impressive levels of growth (and likely expanding, in truth, far slower than the official claims of nearly 7%), the government needs some new tricks to keep its people from getting too restless. One possibility is privatisation.

Selling state assets has proved a boon across western economies. There is no reason to expect China cannot reap similar rewards, provided it conducts the sales in a sensible manner. This requires selling sizeable stakes in good companies to local and foreign buyers. But were Beijing to dispose of, say 30% of China Mobile, or 10% of PetroChina, it would likely gain an immediate audience of local and international investors.

Additionally, if China's government allowed these foreigners to buy these stakes locally, it would gain an immediate capital inflow, helping offset the outbound pressures the country is  experiencing. Utilised correctly, it might help support broader investments into the stock market.

The country could also gain traction by accelerating the expansion of a local bond market and giving private companies – and foreigners – access to it, while simultaneously clarifying bankruptcy rules and making clear the intention to apply them scrupulously.

Another potential boon would be an accelerating SOE reform to genuinely combat their inefficiencies. Too many of China’s state enterprises possess assets that they fail to take full advantage of. Yet to date the biggest outcome of SOE reform has been mergers among state companies. That has merely resulted in even larger monoliths.

By going through SOEs with a chainsaw, hacking off parts that are non-core and better off in the hands of private investors, Beijing can raise capital and inject more competitiveness into its economy.

Would this be politically easy? Certainly not. But one thing Xi is proving with his anti-corruption drive is the strength of his leadership. He might be the first person in 15 years who could genuinely carry out such far-reaching – and increasingly vital – reforms.

Asia benefits from Chinese capital outflows

The realisation that the renminbi is now a two-way bet and slowing economic growth, have led to an increasing outflow of capital from China in recent months. It looks likely to continue in 2016. If harnessed properly, this money could be used to help benefit other capital-starved parts of Asia.

Of course, some of the outflows are speculative ‘hot money’ from investors seeking to pull their cash out of a market this is no longer a one-way foreign exchange bet. It is also in part down to sentiment-fuelled fears over China’s weakening economic prospects. Beijing is well aware of this; witness its cancellation of the qualified domestic institutional investor programme, which was designed to facilitate local professional investor money being invested offshore.

But there are compelling reasons for these investment outflows too. Chinese companies are keener to spend money to work outside the country’s borders. State-owned enterprises and banks are increasingly willing supporters of infrastructure projects across South-east Asia in particular.

Beijing is also encouraging state companies to conduct offshore M&A, to help access new skills and technologies and build Chinese international champions. Some of this activity is going to Europe and the US, but it makes sense to also expand in populous markets closer to home.

Additionally, private companies in China increasingly see Asia’s other markets as ripe for expansion. 

India creates state competition

Narendra Modi

Narendra Modi had colossal expectations placed upon his shoulders upon becoming prime minister of India, in large part due to his own marketing machine. It’s hardly surprising that he has failed to fully live up to them since attaining power.

Partly this is because Modi has not been as bold as some would wish, focusing on incremental reforms. However, he also operates in a parliamentary system, with an opposition-controlled upper house that can strike down his proposed laws. This has stymied his desire to introduce a national goods and services tax, for example.

It’s also worth remembering that India’s states wield a great deal of power themselves, and can resist diktats from above. Modi cannot do everything.

But Modi could also use the power of the states as a mechanism to help bolster Indian growth. As chief minister of Gujarat, he did a fine job promoting pro-business policies and helping the state’s economy flourish. It makes sense to encourage other state heads to conduct similar actions.

In other words, Modi should encourage competition between India’s states. Regions that prove most amenable to cutting needless bureaucracy and implementing pro-business market reforms could receive rewards by the national government, such as prioritisation for infrastructure spending or cheaper lending lines.

Such reforms, if conducted wisely, should benefit local investment and increase jobs. Such successes would likely underscore how beneficial it is for state governments to pursue liberalisation, rather than remain the servant of vested interests or too scared to enact reforms that might upset vocal portions of the local population.

By getting states to compete to become manufacturing- and foreign investment-friendly, Modi could help generate the sort of economic boom that observers originally hoped he could attain. With India's economy already growing at roughly 7.5%, the upside potential from even modest reforms is promising. 

Could Vietnam, Asean or oil prices be a source of cheer in 2016? Click below for Page 2

Vietnamese privatisation powers economy

Vietnam

Vietnam is beginning to regain the attention of international investors, after years of mismanagement and retrenchment. The country is actively aiming to benefit from China’s attempts to haul itself up the manufacturing value chain by filling in below, while its government is considering the merits of privatisation.

These privatisation possibilities have led some to argue Vietnam could end up being included into MSCI’s emerging market stock index by 2017. This seems overly optimistic. However, if Hanoi realises that it will most encourage foreign investment by privatising genuinely sizeable stakes in its companies rather than the tiny slivers it has done to date, it could help precipitate an inflow of capital into an Asian economy that remains tigerish in its potential.

The country looks set to report annual economic growth of around 6.68% for 2015, according to the General Statistics Office in the country on December 26.

Such privatisations, combined with Vietnam’s strong growth, could help bolster local efficiencies, encourage local private companies to seek capital as well, expand the country’s capital market and attract yet more foreign capital and companies.

Japan stocks to continue surging

Could Japan shine?

The meagre, albeit positive, GDP growth in Japan in 2015 failed to cover ongoing concerns about the lack of inflation in the country. Premier Shinzo Abe has place reigniting inflation at the centre of his government’s goals, an understandable desire given the country’s need to both grow and reduce the cost of its debt burden.

To help counter this, the Bank of Japan is embarked upon a well-advertised and concerted effort of quantitative easing, buying back portions of its mountainous debt pile. The likely beneficiary of this has been Japanese stocks, with the benchmark Topix index rising 8.9% in US dollar terms and 9.9% in local currency terms in 2015 according to Bloomberg, as domestic investors put more of their money into higher-yielding investments. Amazingly, this took place despite foreign investors selling $2.1 trillion of Japanese shares last year.

This is likely to continue in 2016 too, and it should be bolstered by foreign investors returning to the market. Investors who are prepared to buy into Japanese shares could enjoy some positive performance from international standard, cash-rich companies, many of which are diversifying into faster-growing economies via large acquisitions.

Asean’s common market kicks of trade flows

Asean is developing

After over 10 years of planning, the end of 2015 heralded the introduction of the Asean Economic Community. The new Southeast Asian trading bloc is designed to compete with other regional heavyweights such as China and Japan.

It certainly has the potential. The AEC includes some of Asia’s fastest-growing economies, in terms of economic growth and populations. Asean’s leaders intend total GDP growth for the region to rise to 5% a year by 2030, which should mean healthy growth for a region with a combined economy of $2.5 trillion today.

Currently, the potential appears limited. Fears exist among members that the playing field is not level. Subsidies are not banned under the community’s rules, leading to fears that some countries will support favoured sectors and seek to grab market share of neighbours.

Yet there is the possibility for trade between these nations to surge, due to reductions in tariff barriers and legal hurdles, and gradual uniformity among labour and investment rules. And the potential to allow freer movement of skilled professionals and to lower logistical costs could be a boon for industries. It could also mean greater specialisation, helping bolster the region’s competitiveness as a whole.

True, the impact of these benefits will grow over several years, not just in 2016. Yet the fact the AEC has finally launched could help precipitate more investment into the region, and help foster a positive attitude towards its prospects.

Low oil prices offer a kicker

Will oil stay cheap?

The decline of oil prices to 10-year lows has hurt a number of countries, not least net exporters Malaysia and Thailand. But for much of Asia ongoing oil price lows are largely a net positive.

While lower prices feed deflation, which might impact Japan’s ongoing battle to raise prices, this is not a major concern in markets such as India or Indonesia. Indeed, low energy prices offer these countries more leeway to promote consumerism domestically.

Similarly, lower energy costs should leave more money in the pockets of Chinese manufacturers and consumers. Provided they can be persuaded to use it, it could offer the country an economic opportunity.

The key question will be whether prices remain low, fall even lower, or rise sharply. US shale producers are struggling under current lows, with more likely to either reduce supply or go out of business.

Given the instability in the Middle East and political volatility in Venezuela, another oil exporter, it is hard to predict how oil prices could move. However, the most likely outcome is that they rise slightly, although it’s more likely they only return to $50-$60 a barrel, rather than $100 a barrel this year. 

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