The best markets in Asia to offer investors protection from potential currency crises are Indonesia and India, according to BNP Paribas’s Asia Pacific equity chief Arthur Kwong.
In his latest investors update the Hong Kong-based manager, who currently runs a number of APAC equity funds including the Parvest Equity Best Select Asia Ex-Japan, said that these two countries are the standout markets in the region.
‘No stranger to currency crises, Indonesia and India have already gone through currency depreciation pains last year in mini crises,’ said Kwong.
‘Both countries were seeing their current account deficits widening and investors pulled funds from the bond and equities markets. But Indonesia and India raised interest rates and are now better positioned and a lot healthier than other emerging markets. ‘
So far this year, he said, the Jakarta stock market has been a top performer and Indonesia’s rupiah is up around 7%.
Similarly, India’s rupee has also been gaining strength and is nearing an eight-month high after dropping sharply last year, which caused high inflation. The country’s current account also fell to just 1% of GDP in the fourth quarter of 2013.
‘Investors have been returning to Indian equities, buoyed by optimism that of a closely followed general election could usher business-friendly Narendra Modi into office. ‘
‘Given their recent experience with currency crises, we believe Indonesia and India are best prepared in the region to deal with currency depreciation.’
Cautious on China
While Kwong is positive on the currency outlook for Indonesia and India, he said the region’s powerhouse China is on shakier ground.
This is after being one of the steadiest trades in recent years, Kwong said the renminbi’s days of expected stability are coming to a close. ‘The yuan has taken a big beating in recent months and is down 2% year to date,' he said.
'We anticipate the yuan will continue to face stress as the US rebounds and export-driven countries weaken their currencies in order to make their exports more attractive. We don’t expect much FDI into China because there is already a great deal of overcapacity.'
His other big concern about China is its credit levels. Looking back ten years, Kwong said GDP and credit growth were about on par at around 12-15% each. Today, however, GDP growth has slowed to about 7.5% while loan growth is nearly triple that at around 20%, he added.
'The power of credit has been reduced dramatically. China is accumulating more debt to GDP and we expect it will soon reach 300% if the current pace continues,' he said. 'Given this environment, we are treading carefully in China, buying selectively using a bottom-up approach.'
Over the past three years, Kwong’s combined fund performance has beaten the average manager performance of 2.49% in the Asia Pacific Equities sector as he posted returns of 7%.