Asia outperformed emerging market peers in Europe and Latin America during the recent selloff, which coincided with a drop in China’s PMI below 50. As Bloomberg's Tamara Hendereson notes, that was partly due to 'smoothing' by Asian central banks to temper volatility and partly because of the region’s reputation for strong growth and ample current-account cushions. Still, she warns, emerging market investors may in time focus more on Asia’s vulnerabilities, including higher valuations, lower real yields and greater sensitivity to Fed tapering and China’s rebalancing.
Via Bloomberg's Tamara Henderson,
Asian currencies tend to be more expensive than those of emerging market peers in Europe and Latin America. After adjusting for trade and inflation, the Chinese yuan and Singapore dollar have a cost disadvantage of more than 10 percent, according to the latest data from the BIS. Exceptions are the Japanese yen, Indonesian rupiah and Indian rupee — which are among the most competitive in emerging markets.
Sensitivity to Fed Tapering
Economies with larger reliance on investment for growth will face stronger headwinds from the higher yields associated with the U.S. Federal Reserve’s tapering of asset purchases. Investment accounts for a more than average share of economic growth in the Asia Pacific region — especially in China (48 percent), India (36 percent), Indonesia (35 percent), Thailand (31 percent), South Korea (29 percent) and Australia (28 percent).
Limited Real Yield Appeal
New Zealand has the highest five-year real yield in the Asia-Pacific region at 2.5 percent, followed by South Korea at 2.1 percent. In the rest of Asia, real yields are below 2 percent or even negative, providing little-to-no reward for the added risk and limiting the appeal to U.S. or European investors who can earn comparable or better returns on domestic assets. Emerging market peers in Europe and Latin America have yields above 3 percent.
Exposure to China
While it is a long-term positive for Asia and beyond, the rebalancing of China’s economy toward consumption is slowing growth and import demand. Emerging Europe and Latin America have less exposure to Chinese trade than Asian counterparts. South Korea, Japan and Taiwan are particularly vulnerable, each accounting for 8.7 percent to 10.2 percent of China’s imports. Australia, Malaysia and Thailand have import shares above 2 percent.