Asia’s role as the world’s growth engine is waning as economies across the region weaken and investors pull out billions of dollars.
The Indian rupee fell to a record low yesterday, Thailand is in recession and Indonesia’s widest current-account deficit pushed the rupiah to its lowest level since 2009. Chinese banks’ bad loans are rising and economists forecast Malaysia will post its second straight quarter of sub-5 percent growth this week.
The clouds forming in Asia as liquidity tightens and China’s slowdown curbs demand for commodities and goods are fueling a selloff of emerging-market stocks, reversing a flow of money into the region in favor of nascent recoveries in the US and Europe. Emerging markets from Brazil to Indonesia have raised borrowing costs this year to try to aid their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations.
“The eye of the storm is directly above emerging markets now, two years after it hovered over Europe and four years after it hit the US,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP in London and former head of foreign-exchange strategy at Morgan Stanley. “This could be serious for Asia.”
Of the US$155.6 billion investors poured into developed-market equity exchange-traded products in the first seven months this year, North American funds received US$102.4 billion or 65.8 percent, according to BlackRock Investment Institute. Japan attracted a record US$28 billion, while Europe-focused funds got US$4.3 billion. In contrast, US$7.6 billion flowed out of emerging-market funds.
“The pendulum is swinging back in favor of the advanced countries,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd, which oversees about US$130 billion. “It’s one of these things that happens once a decade or so when you see a turn in relative performance. We’ve entered a tougher, more difficult period” for Asia.
The IMF last month cut its forecast for growth this year in developing Asia by 0.3 percentage points to 6.9 percent.
In the past three months, the MSCI Asia Pacific Index has fallen 7.7 percent, compared with a 1.2 percent decline in the Standard & Poor’s 500 Index and a 1.6 percent drop in the STOXX Europe 600 Index. Signs of a stronger US economy may prompt the US Federal Reserve to begin paring its US$85 billion in monthly bond purchases as soon as next month.
“We are seeing a turning point,” said Hong Kong-based Lombard Street Research economist Freya Beamish said, adding that China’s competitiveness has been hurt by labor costs that are 30 percent too high. “China’s seeing flat to falling growth on our estimates, so the region’s clouds are already here.”
Sentiment is also being subdued by the prospect of a decline in US stimulus, money that often finds its way to export-based countries in payment for goods.
Investors will be looking for clues on how quickly the Federal Reserve will trim its US$85 billion in monthly asset purchases when the minutes of the Federal Open Market Committee’s meeting last month are released today.
One bright spot is Japan, which has seen its economy bounce back on Japanese Prime Minister Shinzo Abe’s fiscal and monetary stimulus. The Topix stocks index has risen 32 percent this year.
Abe has yet to show that he can sustain the recovery by restructuring company and labor laws and taming the nation’s debt, which topped ￥1 quadrillion (US$10 trillion) in June.
“Asia still has potential in the next three years or more, but in the shorter term, momentum for business is slowing down,” Tokyo-based Mizuho Asset Management Co senior fund manager Shuichi Hirukawa said. “Investors may become more cautious.”