Stock markets in most of Southeast Asia have been a sanctuary for global investors. Not just this year, but ever since markets worldwide started to recover in the first quarter of 2009, as investors enjoyed the benefits of monetary easing. A major attraction has been their defensive qualities, which have protected them from cyclical forces and made them less vulnerable to the slump in global consumption.
But, within the wider Asian region, there have been significant differences. Most importantly, China’s struggles to maintain its historical GDP growth rates and concerns about its local government debt levels have made investors wary. The Shanghai Stock Exchange Composite index now trades at less than half its early-2008 peak.
Sluggish international demand for exports has caused a drag on individual Chinese stock performances, which is a fate shared by other North Asian markets, such as Taiwan and Hong Kong – and also by Singapore. Japan’s stock markets have also struggled, basically trading flat since the summer 2009, while Korea’s Kospi index has rebounded to its pre-crisis levels, but failed to make a convincing breakthrough.
Of course, Korea’s sovereign upgrade to Aa3 (the same as Japan) by Moody’s yesterday might encourage investors to assign more funds to its stock market.
However, during the past year, indications that recovery can be sustained across Asian markets as a whole have proved false, not least because of the continued inability of policy makers to resolve the euro crisis.
Yet, the refuge of Asean has remained secure. The main indices in Indonesia (JSE Composite), Malaysia (KLCI), the Philippines (PSEi) and Thailand (SET) are now trading above their pre-crisis early-2008 highs.
Earlier this year, the IMF forecast that five Asean economies — Indonesia, Thailand, Philippines, Malaysia and Vietnam — will grow 6.2% in 2013, compared with 2.4% growth in the US, 0.9% in Europe and 1.7% in Japan.
Indeed, the SET is up nearly 24% and the PSEi more than 20% year-to-date, compared with the MSCI Asia Apex 50 index (which adjusts for free-floats), which is still more than 30% below its pre-crisis high. In contrast too, the JSE has risen more than 100% in the past three years.
As Markus Rosgen, chief Asian strategist at Citi, pointed out in a report yesterday: “Investors are mostly long the same trade with similar attributes.”
“The relative price performance of stocks with quality attributes versus stocks with risk attributes is back to 2008 levels…[and] Asean carries a higher weight of quality stocks versus North Asia which has a higher weight of risk attribute stocks.”
This divergence might partly explain the unclear results of our latest poll.
Although 26% of respondents expect Asian stocks to recover to their pre-crisis levels by 2013 or sooner, 24% think they’ll have to wait until 2016 or later. Meanwhile, 36% reckon the full recovery will take place in 2014 and 13% opt for 2015.
Clearly, there’s not much of a consensus.
On the other hand, if expectations are being dragged down by concerns about the macroeconomic outlook for North Asia, and in particular China, then these could be mitigated by portfolio rotation to take advantage of historical anomalies between individual regional stocks.
“The relative overvaluation of Asean versus North Asia is at its widest since 1998 levels,” pointed out Rosgen.
And recent economic data, even from China, has been better than forecast.
In addition, he pointed out that the corporate default swaps (CDS) market is showing strong signs of optimism, whereas equity sentiment indicators are far less sanguine. It was the other way round in 2008, and CDS investors called it right that time.