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The gloom in Asian financial markets continued in the month of August as investor sentiment continued to be impacted by high inflation, a hawkish US Federal Reserve, and the war in Ukraine. Asian equities and currencies were in a consolidation phase and edged slightly lower.
The MSCI AC Asia Pacific Index, which tracks the blue-chip stocks in the region, fell 2.71% during the month of August, whereas the MSCI Asia ex-Japan index, which tracks large and mid-cap firms across developed and emerging markets, was down 0.7% during the same period.
“The post-Covid recovery around the world has not been uniform, and each region is facing its own specific challenges. In Asia, one of those challenges is that the Asia export engine seems to be losing steam as goods demand continues to deflate,” said Chetan Ahya, Morgan Stanley’s Chief Asia Economist, in a podcast.
Asia’s weakening exports have been on the radar of other asset managers as well, with HSBC Holdings and Nomura Holdings, both warning of a downturn in Asian export figures. The weakness in exports is mainly due to the slowing global demand as inflation starts to weigh. However, the falling commodity prices are likely to help Asian economies going forward.
Continued challenging economy in China
China’s benchmark indices, Shanghai Composite Index and Shenzhen CSI 300 fell 1.57% and 2.19% in August, respectively, as weak global demand continued to bite. The country is facing economic turmoil as incessant Covid-19 lockdowns cripple the manufacturing sector. The NBS Manufacturing PMI for China stood at 49.4 in August, indicating a contraction in factory activity for a second straight month. Output, new orders, and export sales all remained weak.
The jobless rate in China somewhat improved as unemployment inched lower in July, but the youth jobless rate hit a record high of 19.9%. Most businesses have also slowed hiring in China due to the pandemic whereas the recovery has been hindered due to the zero-Covid policy.
China’s offshore yuan depreciated past 6.93 against the dollar in late August, sliding to its lowest levels in two years as China’s diverging monetary policy weighed on the currency. While the rest of the world has been tightening monetary policies, Beijing intends to keep its ultra-loose monetary policy in place to spur growth.
The Hong Kong Stock Market Index (HK50) fell 1% in August, as Covid-19 troubles in the mainland impacted investor confidence.
But it seems that the situation might improve soon. “We think that China domestic demand recovery should pick up the pace by early next year as the full effects of its stimulus kicks in and private confidence lifts, thanks to China’s anticipated shift to a living with Covid stance,” Morgan Stanley’s Ahya said in the podcast.
China’s high-yield dollar bonds had a great month to deliver their best returns in 10 years, as the government extended support to the embattled property sector. Bloomberg reported that China’s junk dollar bonds broke their 11-month losing streak to rise 6.8%. The policy rate cut by the People’s Bank of China, Beijing’s support for property bonds of six developers and the special loans by the government to unfinished property projects helped China bonds.
India’s SENSEX and Nifty50 up
Meanwhile, neighbouring India’s SENSEX and Nifty50 were up 3.42% and 3.50%, respectively. While the second quarter GDP growth of 13.5% was lower-than-expected, the manufacturing PMI stayed in the positive territory of 56.2 in August. New export orders rose faster, whereas input costs were lower due to easing commodity prices. India’s Services PMI increased to 57.2 in August, turning away from the July four-month low of 55.5 and well above market expectations of 55.
Domestic demand also seems to be improving as auto sales jumped 13.1% in August. The bi-monthly consumer confidence survey conducted by India’s central bank in July showed that the consumer sentiment is recovering, with the current situation index (CSI) rising by 1.4 points on the improved perception of employment, household income and spending.
The Indian rupee, however, continued to hover around its historic low of 80 against the dollar as rising interest rates have spooked investors. The Reserve Bank of India has consistently raised interest rates in three monetary policy meetings to 5.40%. The central bank is expecting an inflation rate of 6.7% for the full year.
“We continue to be constructive on India, Indonesia and Philippines as they are well placed to generate domestic demand alpha,” says Ahya.
ASEAN markets fared well
Indonesia’s Jakarta Composite Index rose 3.27% in August, as the country continued to post a strong recovery from the pandemic with a GDP growth of 5.44% in the second quarter. Indonesia has benefitted from the US-China decoupling and the war in Ukraine, as companies aligned their business priorities and investors explored options outside of China. Commodity stocks in Indonesia reaped the benefits of high prices, but the profits are expected to shrink in the coming months as prices ease.
However, Southeast Asia’s biggest economy is likely to continue its upward moves in the long term. “On the growth front, Indonesia is still poised to grow at a healthy and robust clip driven by consistent household spending. The Russia-Ukraine war initially forced commodity prices higher, benefiting Indonesia’s export sector,” writes Nicholas Mapa, senior economist at ING.
The Philippine Stock Exchange’s PSEi was up 4.24% in August, with FDI surging in recent months. However, the archipelago is facing high inflation and the Peso is near an all-time low. The Philippines in August hiked its key overnight borrowing rate to 3.75%, the fourth rate hike this year and more on the cards.
Elsewhere in Southeast Asia, Vietnam’s VN Index rose 6.15%, Malaysia’s Kuala Lumpur Composite Index was up 1.3% and Singapore’s Straits Times Index fell 0.31%.
Bloomberg in a recent report said ASEAN economies fared much better than the Asia Pacific and are likely to outperform a gauge of global stocks for the third straight quarter.
“Bolstered by AEC’s (ASEAN Economic Community) economic integration agenda – as well as the recently passed landmark Regional Comprehensive Economic Partnership (RCEP) – the region’s rich resource reserves, established manufacturing base and rapid industrialization will continue to attract investors from around the globe,” said Hong Kong-based business expansion services provider Tricor Global.
