Only when the tide goes out do you discover who’s been swimming naked, said Warren Buffett, and it seems ASEAN got caught pants down when the QE taper talk intensified.
Since the start of 2013 until the end of August, ASEAN, represented by the MSCI South East Asia index, has fallen 7.66% while the MSCI All Country World index gained 9.23% in USD terms.
Of course, 18 September came and went, and the QE programme remains in place, taking markets on a temporary rally.
Asian financial crisis revisited prior to the Fed’s phantom taper, currency volatility in Indonesia once again drew comparisons with the Asian financial crisis of 1997, which saw the southeast Asian markets and currencies of Thailand and Indonesia collapse.
But that was 1997, this is 2013.
Riding tapering uncertainty
Geoff Lewis (pictured left), global market strategist at JP Morgan Funds: ‘The ASEAN region is in much better financial shape compared with 1997 and the long-term investment and consumption stories remain intact.'
'With stronger economies, low inflation, greater FX reserves and less dependence on short-term US dollar funding, the ASEAN region today simply does not bear comparison with the situation in 1997.’
According to data compiled by JP Morgan Asset Management, in 1997, Indonesia’s reserves totalled US$17.5 billion; at end-2012, that figure stood at US$108.8 billion.'
'Thailand in 1997 had total reserves of US$26.9 billion; at end-2012, it had US$173.3 billion. So while ASEAN is unlikely to plunge into a currency crisis, the question then is how will it weather the transition in US monetary policy?'
The word ‘unprecedented’ often accompanies any discussion of QE, and consequently, the impact of the taper is similarly uncertain. But managers believe Asia is well-positioned to ride out the crisis.
Ooi Boon Peng, CIO of fixed income at Eastspring Investments, noted: ‘As the extent of the QE is massive, the unwinding process will likely trigger financial market and economic volatility.
Asian fixed income markets will not be immune but should be relatively stable. Our confidence stems from the high levels of domestic demand, savings rate and domestic liquidity in the region that we think can fill the gap when foreign investors pare their exposures.’
Where volatility has hit hardest, is in economies with a current account deficit, such as Indonesia. However, relative to India, another current account deficit economy, Indonesia’s political system is less fragmented, and reforms can more easily be put into place.
Indonesia not in trouble
According to Ashish Goyal (pictured left), investment director with Eastspring Investments: ‘Indonesia’s current account problem can be partially managed by cutting subsidies, which discourages excessive consumption.'
'They have some subsidies, but they’ve kept them in check, and they don’t have a fiscal account problem. So if Indonesia puts in a few new policies, they can make progress quite quickly.’
Given the recent reprieve it remains to be seen if ASEAN economies are indeed putting in the necessary policies to ensure a more stable market. And nowhere are reforms more urgently needed than in India.
In a newspaper interview, the Governor of the Reserve Bank of India, Raghuram Rajan put it best, saying: ‘What we need to do is put our house in order before it [tapering] comes back. The postponement of tapering is only that, a postponement.'
'We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.’
While reforms make their way into the system, sources of alpha can still be found within ASEAN.
Sharat Shroff (pictured left), portfolio manager at Matthews Asia, said: ‘The areas we have emphasised are businesses that provide us access to the domestic economies of Asia and we’ve found good opportunities in Indonesian telecoms.’
So while volatility reigns, investors in ASEAN remain on the lookout for potential gains.
As Daniel Chan, managing director at DCG Capital notes: ‘The sharp sell-off is more of a buying opportunity in the long run.’
This article originally appeared in the October issue of Citywire Global magazine