Should investors be overly concerned about the state of emerging Asian economies in the wake of the global financial market selloff this week?

Global financial markets are currently feeling the impact of last Friday, January 24, 2014 selloff, sparked off in part by the disappointing Flash HSBC/Markit Economics Group Purchasing Managers’ Index (PMI) for China, which declined by 4 basis points to 49.6, versus 50.0 during the month of January 2014, and the Argentinian Peso devaluation, which according to the data feed provided by Bloomberg News on January 27, 2014 during early Asian trading hours, fell to almost US Dollar/Argentinian Peso of 8.000, from the previous close of 7.8825. These two main trigger points, along with the ongoing political unrest in Thailand, and Cambodia, have caused many investors to be increasingly concerned about the growth outlooks for the Asia-Pacific region on the whole.

According to a Bloomberg News article published on January 27, 2014, the Chicago Board Options Exchange (CBOE) Emerging Markets ETF Volatility Index rose by approximately 40.0 percent to 28.26 last week, on concerns of a slowing Chinese economy, and emerging markets jittery spillovers coming from countries such as Turkey, Indonesia, Philippines, Thailand, India, among others. The rise in the so-called ‘Emerging Markets VIX Index’ or a fear gauge for emerging economies saw its largest single week move since September 2011. Bearish bets outnumber bullish ones on the underlying exchange data fund (ETF) by the most since July 2013 with approximately 60.0 percent more puts than call options.

With the global selloff of many financial instruments across the board starting this Monday, January 27, 2014 with many Asian financial markets trading lower, are investors being too panicky, or are too rushed into joining the entire global markets selloff bandwagon? Have investors overlooked certain basic economic fundamentals in emerging Asia, and Asia as a whole while executing their sell order transactions? It does warrant some rational thinking, and putting everything into perspective. It has been known since 2008 that China will not be able to achieve the 10.0 percent growth trajectory going forward, without stepping up reforms on its financial sector, reducing its reliance on financial leverage, advocating environmental safety, reduce infrastructure, and housing developments. The recent reforms introduced by the Chinese government in the November 2013 Third Plenary Meetings are not intended to send the Chinese economy crashing downwards, but to provide a cushion for a soft landing. Despite the slowdown in the latest Chinese PMI data, many analysts, including the Chinese government policy makers, and the International Monetary Fund (IMF) are still expecting moderate pace of growth to be somewhere in the low 7.00 percent range.

In a recent Thomson Reuters News article dated January 24, 2014 where it reported that in a latest poll of 225 economists, it was concluded that emerging Asian economies will contribute less to global growth in 2014. From China to India, Indonesia, Taiwan and Thailand, the January 16-23 poll showed that most of the 225 economists surveyed, growth estimates for nine of the top 13 economies outside of Japan have been collectively downgraded or left unchanged. Although much of the economic slowdown expected in 2014 comes from China, but investors might be misguided if they did not look to other emerging Asian economies which have seen earlier declines for most of last year on concerns of premature monetary stimulus withdrawals coming from the US Federal Reserve (US Fed), have now come to terms with the monetary stimulus withdrawals, and are currently in the process of undertaking tough economic reforms to bring down those sky high current account deficits.

This message was also be echoed similarly through one of the senior economists from BNP Paribas Hong Kong, Mr. Andrew Fresis, who made remarks during a January 27, 2014 Bloomberg Television broadcast interview in its Hong Kong studio saying that investors might be too quick to pull the trigger, as his personal take after seeing how the latest movements in many Asian financial markets, and currencies such as the Indonesian Rupiah, the Philippines Peso, the South Korean Won and the Indian Rupee mild moves do not, in his opinion, warrant such an extent of a sell off among Emerging Asian economies, as many of these economies have priced in the impact of the US Fed monetary stimulus withdrawals, and are not expected to see much of the same level of volatilities seen as compared to last year. Although the latest Chinese PMI numbers came in as underwhelming for many investors, investors should not forget that China is just starting a new transition of its economy to a more socially oriented, less emphasis of Gross Domestic Product (GDP) output type of growth policies. Gone are the days of large scale infrastructure led growth, and in, comes with social reforms such as relaxing its one-child polices, opening up its financial markets, attempts to reinforce tough environmental safety laws, among others. He is also seeing pockets of growth emerging in places such as Indonesia, Vietnam, the Indo-China region, and Taiwan. He is also seeing South Korea coping relatively well, despite the strengthening Korean Won currency seen in recent months. The expected economic outlook for South Korea during 2014, as announced earlier in the year by the country’s government, was for somewhere close to 4.0 percent growth trajectory, which is quite robust as compared to Japan, which according to the International Monetary Fund (IMF) in its latest revised economic outlook for 2014, calling for an unchanged 1.7 percent growth trajectory.

With the current global financial markets selloff taking place, it does warrant taking a step back and evaluate the overall long-term growth picture of many emerging Asian economies. The Asian Financial Crisis in 1997-1998 has woken up many Asian economies, including Thailand, Indonesia, South Korea, among others to examine their domestic economic policies, and implementing reforms to strengthen its finances, opening up their economies to free trade and foreign direct investments (FDI). Since the late 1990s financial crisis took place in Asia, many governments have gradually opened up their economies for foreign investments. Newly emerging Asian economies including Myanmar, Vietnam, Mongolia, among others are now starting to see more foreign investments coming into their countries. Rather than adopting insular economic reforms, many of these so-called ‘Frontier’ markets have emerged quite strong despite the slowdown taking place in China, India, and the rest of the emerging markets. There is got to be something in these countries such as Myanmar, and Vietnam that have many foreign investors are eyeing for potential opportunities going forward, and it is quite clear that these markets will be closely watched in terms of the relatively large consumer markets potential, public infrastructure, and government institutions are still relatively at undeveloped stages, and in urgent need for repair and rebuild.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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