Asia market sputter spoils spirit

Hopes were dashed for a later year core Asia emerging stock market rally and clear momentum going into 2019, as Chinese 'A' and Korean shares shed over 20% on the Morgan Stanley Capital International Index as the biggest losers outside Pakistan, which tumbled almost 40%. In the rest of the pack in order the Philippines was down 17%, followed by Indonesia and Taiwan (-11 %,) and India, Indonesia and Thailand (-8%), for regional performance roughly in line with the overall benchmark's more than 15% drop.

On the frontier list, Bangladesh, Sri Lanka and Vietnam sank 15%, with the only positive geography for 2018 in the Middle East with double-digit gains in Kuwait, Saudi Arabia and Tunisia. Investors are set for continued choppiness against the backdrop of slower global growth, trade and currency friction, and steeper interest rates. They note that as Washington and Beijing remain at odds, the comprehensive free commerce pact between Asian and Latin American signatories was inked. Fund managers focus on immediate beneficiaries like Vietnam from possible supply chain diversion and expansion, as they target countries and sectors that can ride out likely export, infrastructure and banking system upsets.

China and Korea received the most from $20 billion in data-tracked equity fund inflows due to their large index weightings, with exchange-traded funds allocating one-quarter the total. The Asia Development Bank pointed to warning signs in December as Korean exports were flat, but off 15% to China with an 8% semiconductor plunge on an annual basis. China's Purchasing Managers Index (PMI) at the same time was below 50, into contraction for the first time in two and a half years. Auto sales slipped 3% in 2018, breaking a two-decade streak, and new export orders were down for a half-year straight in December. The services PMI was 54 in contrast, as the third-quarter $80 billion services deficit was $20 billion under the goods surplus. With external debt reported at almost $2 trillion at end-September, the central bank pledged loose monetary policy to preserve 6.5% growth, including a small business-directed reserve requirement cut, would keep the yuan stable. Analysts otherwise predict intervention will cap the dollar exchange rate at 7 yuan while US trade and investment negotiations continue. The government repeated stimulus restraint while focusing on tax relief and 'structural deleveraging,' as state-owned and private companies prepared to extend their $180 billion cross-border deal binge, up 15% annually.

The 25% Shanghai Composite slide was the worst in a decade, as the number of approved initial public offerings was one-third below 2017

The 25% Shanghai Composite slide was the worst in a decade, as the number of approved initial public offerings was one-third below 2017. With the correction, officials claimed to be out of bubble danger and called for deeper changes to spur long-term domestic inflows through asset managers, including foreign-controlled ones. Tech companies separately raised $70 billion in private equity, according to industry sources, and the institutional investor vision aims to mirror wealth management product participation, which grew online 65% in recent years by Moody's Ratings calculations.

India also has a vibrant venture capital scene, but new tax policies may hurt activity, as the ruling coalition appeals to lower and middle-class voters in the upcoming national elections after December setbacks in state polls. Although the equity market loss was half China's, the currency depreciated 10% against the dollar with the stubborn current account deficit. New project investment in the last quarter was the lowest in Prime Minister Narendra Modi's term, and central bank independence is in play after the previous head resigned and was replaced by a senior finance ministry representative. Although GDP growth is estimated above 7%, the deficit has already overshot the March full fiscal year target.

Indonesia heads into its own April re-election contest with incumbent President Joko Widowo in the opinion survey lead by 25 points over previous challenger General Prabowo Subianto, after recruiting a vice presidential candidate with strong Islamic party ties. Foreign direct investment softened 20% in the third quarter with an Australia free trade accord still on hold, but private consumption sustains 5% growth. The 1.7% of GDP budget gap was the best in five years, while the current account deficit at that level in 2017 could double into 2019 on hydrocarbon imports. With almost a 200 basis point bump, the central bank was the top hiker last year with an uphill climb in store for the region across monetary policy and other areas.

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