global financial update v2
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TRANSCRIPT
WANT TO KNOW FUTURE?
SURE.
SEPTEMBER 11, 2013
TI EMSPECIAL REPORT: THE POPULARITY OF CWM DESIGNATION
CHARTERED WEALTH MANAGER
FELLOWSHIP DINNER
SEPTEMBER 11, 2013 MANILA, PHP
2011.
2012.
19th November 2012
18th January 2013
On November 6 2012, Obama became the first Democratic president since Franklin D. Roosevelt to twice win the majority of the popular vote and being elected as President.
2013.
2013 unfolds with Taliban story …… Burma and then to Europe.
February & March … was consumed with Pope and issues around church
April …mixed bag
May …Japan, Gen Y
June from tornado ..to china …to informers
July … a twist. Buddhist Terror. Happiness. Back to Egypt.
August & September …. As it unfolds
Cyprus Spain Greece Italy
Portugal
India
Indonesia
Australia
Brazil Currency
China
Russia
Japan
UK
Ireland
PIGS PIGS Portugal | Italy | Greece | Spain
PIGS PIGS Portugal | Italy | Greece | Spain
PIIGS Portugal | Italy | Ireland | Greece | Spain
PIGS PIGS Portugal | Italy | Greece | Spain
PIIGS Portugal | Italy | Ireland | Greece | Spain
PIIGGS Portugal | Italy | Ireland | Greece | Great Britain | Spain
BRIC Brazil | Russia | India | China
BRIC Brazil | Russia | India | China
BRICS Brazil | Russia | India | China | South Africa
High Deficit Economies STUPID Spain | Turkey | UK | Portugal | Italy | Dubai
Six favored emerging markets CIVETS Colombia | Indonesia | Vietnam | Egypt | Turkey | South Africa
Rising Stars NEXT 11 Bangladesh | Egypt | Indonesia | Iran | Mexico | Nigeria | Pakistan | Philippines | South Korea | Turkey | Vietnam.
VIEWS 6 INVESTMENT
1997 AGAIN? ASIA
The recent sharp sell-off in emerging market (EM) debt and currencies has raised investor concerns that Asia could see a repetition of the financial crisis in 1997–1998.
NO 1997 AGAIN? ASIA
Will Asia see a repetition of the 1997 financial crisis?
WHY?
1997 AGAIN? ASIA
ASIA IS IN MUCH BETTER SHAPE NOW THAN IN 1997
Improvement in current account balances
Higher level of foreign exchange reserves
Lower dependence on external debt
More flexible currency regimes
ASIA IS IN MUCH BETTER SHAPE NOW THAN IN 1997
Improvement in current account balances
Higher level of foreign exchange reserves
Lower dependence on external debt
More flexible currency regimes
IMPROVEMENT IN CURRENT ACCOUNT BALANCES HOW DOES IT HELP ?
Current Account Balance Net of ‘Exported’ and ‘Imported’ goods and services, plus the net flow of income from investments and employment. A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments.
Singapore and Hong Kong, 3 September 2013 Asia Pacific
Global Research Investment horizon: 6 – 12+ months
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aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. For a discussion of the risks of investing in the securities
mentioned in this report, please refer to the following Internet link: https://research.credit-suisse.com/riskdisclosure
1997 financial crisis redux for Asia?
Asia is in much better shape now than in 1997
The recent sharp sell-off in emerging market (EM) debt and
currencies has raised investor concerns that Asia could see a
repetition of the financial crisis in 1997–1998. While the
recent sell-off in the Indonesia rupiah (IDR) and the Indian
rupee (INR) has been extremely sharp, we do not think that
this marks the start of a wider contagion that will lead to a
region-wide capital flight similar in scale to that seen in the
1997 Asian financial crisis (AFC). With the exception of India
and Indonesia, the external balances and macroeconomic and
financial fundamentals of most Asian economies have seen a
substantial improvement since 1997 (Figure 1). More
specifically, there have been some positive developments
since 1997, which have helped to significantly reduce Asia’s external vulnerability.
(1) Substantial improvement in current account balances – One basic measure of the health of a country's
Figure 1 Sharp improvement in current account balances of most Asian
economies since the 1997 Asian financial crisis
-10
-5
0
5
10
15
20
IN ID TH HK CN MY PH KR TW SG
1996 2013F
Current account (% of GDP)
Source: IMF World Economic Outlook Database April 2013, Credit Suisse
Research Weekly Asia Will Asia see a repetition of the 1997 financial crisis?
Private Banking
Highlights
We do not think Asia will see a repetition of
the 1997 financial crisis due to the
substantial improvement in current account
positions and FX reserves of most Asian
economies, while the region's dependence
on foreign financing has fallen.
According to our external vulnerability
scorecard, India and Indonesia are most
vulnerable to capital outflows, while China
and the Philippines are least vulnerable.
We favor Asian equity markets with strong
external balances and FX reserves and stay
overweight on Taiwan and Hong Kong. We
see tactical opportunities in China due to its
strong surpluses and growth stabilization.
We underweight equities in Indonesia and
India, given their high external vulnerability.
We remain negative on the IDR and the
INR and avoid local currency bonds in these
two countries.
Top investment ideas
FX: Stay negative on the IDR and the INR, with 3M and 12M USD/IDR forecasts at 11,000 and 11,300 and 3M and 12M USD/INR forecasts at 66.0 and 68.0, respectively. We are positive on the CNY and forecast USD/CNY at 6.10 in 3M and 6.00 in 12M.
One basic measure of the health
of a country's external
balance is the current
account balance.
1
POINT § Balance of payments (BoP) in India, Indonesia, Malaysia and
Thailand have deteriorated markedly in recent years.
§ Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets.
§ Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas.
§ Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.
HIGHER LEVEL OF FX RESERVES HOW DOES IT HELP ?
Impart of FX reserve A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify.
The level of foreign exchange
(FX) reserves determines the
extent to which a country can
maintain stability in the value of its currency during times of capital
outflows.
Singapore and Hong Kong, 3 September 2013
2
external balance is the current account balance. In simple terms, it measures the difference between a country’s exported and imported goods and services, plus the net flow of income from investments and employment (e.g., workers’ remittances). A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments.
As shown in Figure 1, many Asian countries prior to the AFC were running current account deficits that were between 0% and 5% of the gross domestic product (GDP). Despite running current account deficits, most Asian countries were able to maintain stable exchange rates until 1997, as prospects of strong growth and high interest rates helped these economies attract foreign investment capital. However, when investment sentiment suddenly turned in 1997 and external financing conditions became more difficult, the current account balances could not adequately cushion the exchange rate weakness when capital flight intensified.
But in the wake of the AFC, weaker exchange rates have helped improve the competitiveness of Asian economies, making exports cheaper for foreign importers. Together with the proactive policy support of Asian governments, this has allowed many countries to expand their export sector further. Consequently, most Asian economies now post current account surpluses because of higher exports, with Taiwan and Singapore having the largest surpluses (as % of GDP) in the region (Figure 1).
That said, we highlight that the balance of payments (BoP) in India, Indonesia, Malaysia and Thailand have deteriorated markedly in recent years (Figure 2). Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets. Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas. Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.
(2) Much higher level of foreign exchange reserves – The level of foreign exchange (FX) reserves determines the extent to which a country can maintain stability in the value of its currency during times of capital outflows. A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify.
The painful experience of 1997 drove many Asian countries to increase their precautionary holdings of FX reserves over the past two decades. As illustrated in Figure 3, the level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997. However, the increase in Indonesia and India’s FX reserves has been fairly negligible.
Nevertheless, we also note that in the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies. (3) Lower dependence on external debt financing and lower degree of currency mismatch in corporate balance sheets – One factor which aggravated the negative impact of the AFC was Asian countries’ heavy reliance on external financing. In the mid-1990s, Asian companies, banks and governments borrowed heavily in foreign currency terms, assuming the fixed exchange rate regimes would hold. The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments). When the crisis unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers.
Asia’s dependence on short-term external financing has fallen significantly over the past two decades. That said, we note that Asia has nonetheless become more dependent on foreign portfolio flows to help finance investment plans. While equity investments dominated the 2000s, foreign investors’
Figure 2 Figure 3 Balance of payments in India, Indonesia, Malaysia and Thailand deteriorates in recent years
Most Asian economies now have a bigger stock of FX reserves to counter currency weakness
-10
-5
0
5
10
15
20
25
93 95 97 99 01 03 05 07 09 11 13
India Indonesia Thailand Malaysia
Basic Balance (C/A + net FDI), % of GDP
10
13
23
26
29
38
39
40
83
91
107
0 20 40 60 80 100 120
Indonesia
India
Japan
Korea
Philippines
Thailand
China
Malaysia
Taiwan
Singapore
Hong Kong
Dec-1997 Current
in % of GDP
Source: CEIC, Credit Suisse
Source: DataStream, Bloomberg, Credit Suisse
The level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997
2
POINT § The increase in Indonesia and India’s FX reserves has been
fairly negligible.
§ In the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies.
LOWER DEPENDENCE ON EXTERNAL DEBT HOW DOES IT HELP ?
External Debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country.
One factor which aggravated the negative impact of the Asian Financial Crisis (AFC) was Asian countries’ heavy reliance on external financing.
What happened in AFC? ① In the mid-1990s, Asian companies, banks and governments borrowed heavily
in foreign currency terms, assuming the fixed exchange rate regimes would hold.
② The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments).
③ When the AFC unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers.
3
POINT § Asia’s dependence on short-term external financing has fallen
significantly over the past two decades. § NOTE - Asia has nonetheless become more dependent on
foreign portfolio flows to help finance investment plans. § Equity investments dominated the 2000s, foreign investors fixed
income investments picked up after the 2008 global financial crisis. However, these fixed income investments are mainly dominated in local currency.
§ The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly.
§ As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997.
§ Reduced duration mismatch.
§ Equity Investment; not debt.
§ Debt in local CCY.
§ Better duration & FX management
§ Safer for economy
MORE FLEXIBLE CURRENCY REGIMES HOW DOES IT HELP ? What happened in AFC? ① Prior to the AFC, economies such as
Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD).
② These countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy.
4 Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
POINT § Most Asian countries now adopt a managed float regime,
with varying degrees of currency flexibility across countries.
§ Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions.
§ The increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices.
§ Managed float vs Fixed pegged exchange rate.
§ Greater Flexibility – on top of matter.
§ Less complacent
VULNERABILITY & SAFEST ASIA IS MANY MARKETS
Which countries are most vulnerable? ① The expected tapering of the US Federal
Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years.
② Investment Research (Credit Suisse) presented an external vulnerability scorecard – that compares the ratio of FX reserve relative to each Asian country’s external financing needs, including the potential risk of portfolio outflows.
Summary Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
POINT § India and Indonesia are most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows for both countries is less than 100%. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies.
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
§ The next two weakest countries are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries.
POINT § The two strongest countries are China and
the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows.
§ Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively.
Singapore and Hong Kong, 3 September 2013
3
fixed income investments picked up after the 2008 global financial crisis. Nevertheless, these fixed income investments are mainly dominated in local currency. The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. (4) More flexible currency regimes – Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). However, when these countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy (Figure 4). In contrast, most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. Moreover, the increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. Gauging Asia’s external vulnerability: India and Indonesia are most vulnerable
The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. In assessing the investment risks in the Asian markets ahead of the upcoming Fed tapering, one important question to consider is which countries in Asia are most vulnerable if external financing conditions continue to worsen, or if portfolio outflows continue to increase.
In this report, we present an external vulnerability scorecard that compares the ratio of FX reserves relative to each Asian country’s external financing needs and the
potential risk of portfolio outflows (Figure 5). The external financing requirements are defined as the sum of the basic balance of payments (which equals the sum of the current account and net FDI) and maturing short-term external debt. Essentially this method assesses the adequacy of each country's FX reserves to protect against potential capital outflows under more challenging and risk-adverse markets and external financing conditions.
In Table 1 and Figure 5, we present the detailed results of our external vulnerability analysis. Our analysis shows that India and Indonesia stand out as the most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows (total external financing requirements plus potential portfolio outflows) for both countries is less than 100%, the lowest ratio among the ten Asian economies examined in our study. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. The next two weakest countries on our scorecard are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries. China and the Philippines are safest
The two strongest countries on our scorecards are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. In conclusion, while the deterioration in the current accounts and balance of payments of selected weaker Asian economies is likely to remain a key investor concern in coming months, we believe the risks of a region-wide contagion and full-scale financial crisis similar to the AFC remain contained due to the substantial improvement in the external balances, and macroeconomic and financial fundamentals of most Asian economies since 1997.
Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows *
700
0
100
200
300
400
500
600
94 95 96 97 98 99
Indonesia Korea Thailand Malaysia
USD exchange rate against local currency (1994 = 100)
External vulnerability assessment (ratio of FX reserves to potential outflows)
0100200300400500600700800900
1000110012001300
ID IN MY TH KR HK SG TW PH CN
%
Source: Bloomberg, DataStream, Credit Suisse
* Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
MAKING THE POINT
Singapore and Hong Kong, 3 September 2013
4
Dennis Tan, [email protected]
Mitigate external vulnerability risks in our Asian strategy
Fed tapering heightens sensitivity of Asian equities to external vulnerability risks
After the Federal Open Market Committee (FOMC) meeting in May ignited the QE tapering debate, EM bonds and EM currencies have come under selling pressure in the past three months as a result of capital outflows from the weaker EM with deteriorating current account deficits and balance of payments. Fundamentally, it is more challenging for countries with large current account deficits and external debt to finance their external requirements when US yields are rising and QE-driven liquidity is unwinding.
The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India,
Indonesia, Brazil, South Africa and Turkey. As our central scenario predicts that the Fed will start tapering bond purchases from September, the trend of capital outflows from the indebted countries is unlikely to reverse soon. Underweight current account deficit markets: Indonesia and India
Since 31 May, the MSCI Asia ex-Japan has dropped 7.5%, underperforming the 0.6% gain of the MSCI World. India and the TIP markets (Thailand, Indonesia and the Philippines) have led the declines in the Asian equity markets, driven by currency depreciation and capital outflows associated with rising US bond yields on Fed tapering concerns (Figure 6). The Sensex has dropped 10% from its 20 May high after the Indian government introduced emergency liquidity tightening measures to curb the sharp declines of the INR (Figure 7), adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the
Table 1: External vulnerability assessment for Asian economies (ratio of FX reserves to potential outflows under more challenging external financing conditions*) (Figures in USD bn) CN HK IN ID KR MY PH SG TW TH
Current account + net FDI* A 346.0 -10.1 -82.0 -16.9 49.6 0.7 17.0 81.0 38.9 2.2
Short-term external debt** B 611.7 60.2 191.3 89.9 160.6 85.5 19.5 141.9 128.0 81.1
Total external financing requirements (TEFR) C = A + (-B) -265.7 -70.3 -273.3 -106.8 -111.0 -84.8 -2.5 -60.9 -89.1 -78.9
30% of total foreign portfolio inflows since 2010 D 34.9 20.4 25.7 6.9 18.7 19.8 6.3 0.5 2.0 7.0
TEFR + portfolio outflows E = C +(-D) -300.6 -90.7 -299.0 -113.7 -129.6 -104.6 -8.8 -61.3 -91.0 -86.0
Total FX reserves F 3,497 300 273 88 375 144 86 261 409 195
Ratio of FX reserves to potential outflows F/E 1163% 331% 91% 77% 289% 137% 979% 426% 449% 227%
Ranking (1 = best, 10 = worst) 1 5 9 10 6 8 2 4 3 7
* 2013 forecasts based on annualized figures of H1 2013 data. ** By residual maturity and including amortization of long-term debt. Excluding banking sector debt for Hong Kong and Singapore due to their status as financial centers. Source: CEIC, Bloomberg, IMF, Reserve Bank of India, Bank Indonesia, Credit Suisse
Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD
Performance
-20
-15
-10
-5
0
5
Japa
n
Kor
ea
Chi
na
MS
CIA
sia
Pac
ific
Aus
tralia
Hon
g K
ong
Taiw
an
MS
CIA
sia
ex J
apan
Sin
gapo
re
Mal
aysi
a
Thai
land
Phi
lippi
nes
Indi
a
Indo
nesi
a
-17.4-10.4
-8.2
-7.7
-4.8
-4.2
-4.1
-3.2
-0.1
1.8
-16-15-14-13-12-11-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4
USD/INR
USD/IDR
USD/PHP
USD/MYR
USD/THB
USD/SGD
USD/KRW
USD/TWD
USD/HKD
USD/CNY
% returns YTD
Source: Bloomberg, Credit Suisse
Source: Bloomberg, Credit Suisse
Singapore and Hong Kong, 3 September 2013
4
Dennis Tan, [email protected]
Mitigate external vulnerability risks in our Asian strategy
Fed tapering heightens sensitivity of Asian equities to external vulnerability risks
After the Federal Open Market Committee (FOMC) meeting in May ignited the QE tapering debate, EM bonds and EM currencies have come under selling pressure in the past three months as a result of capital outflows from the weaker EM with deteriorating current account deficits and balance of payments. Fundamentally, it is more challenging for countries with large current account deficits and external debt to finance their external requirements when US yields are rising and QE-driven liquidity is unwinding.
The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India,
Indonesia, Brazil, South Africa and Turkey. As our central scenario predicts that the Fed will start tapering bond purchases from September, the trend of capital outflows from the indebted countries is unlikely to reverse soon. Underweight current account deficit markets: Indonesia and India
Since 31 May, the MSCI Asia ex-Japan has dropped 7.5%, underperforming the 0.6% gain of the MSCI World. India and the TIP markets (Thailand, Indonesia and the Philippines) have led the declines in the Asian equity markets, driven by currency depreciation and capital outflows associated with rising US bond yields on Fed tapering concerns (Figure 6). The Sensex has dropped 10% from its 20 May high after the Indian government introduced emergency liquidity tightening measures to curb the sharp declines of the INR (Figure 7), adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the
Table 1: External vulnerability assessment for Asian economies (ratio of FX reserves to potential outflows under more challenging external financing conditions*) (Figures in USD bn) CN HK IN ID KR MY PH SG TW TH
Current account + net FDI* A 346.0 -10.1 -82.0 -16.9 49.6 0.7 17.0 81.0 38.9 2.2
Short-term external debt** B 611.7 60.2 191.3 89.9 160.6 85.5 19.5 141.9 128.0 81.1
Total external financing requirements (TEFR) C = A + (-B) -265.7 -70.3 -273.3 -106.8 -111.0 -84.8 -2.5 -60.9 -89.1 -78.9
30% of total foreign portfolio inflows since 2010 D 34.9 20.4 25.7 6.9 18.7 19.8 6.3 0.5 2.0 7.0
TEFR + portfolio outflows E = C +(-D) -300.6 -90.7 -299.0 -113.7 -129.6 -104.6 -8.8 -61.3 -91.0 -86.0
Total FX reserves F 3,497 300 273 88 375 144 86 261 409 195
Ratio of FX reserves to potential outflows F/E 1163% 331% 91% 77% 289% 137% 979% 426% 449% 227%
Ranking (1 = best, 10 = worst) 1 5 9 10 6 8 2 4 3 7
* 2013 forecasts based on annualized figures of H1 2013 data. ** By residual maturity and including amortization of long-term debt. Excluding banking sector debt for Hong Kong and Singapore due to their status as financial centers. Source: CEIC, Bloomberg, IMF, Reserve Bank of India, Bank Indonesia, Credit Suisse
Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD
Performance
-20
-15
-10
-5
0
5
Japa
n
Kor
ea
Chi
na
MS
CIA
sia
Pac
ific
Aus
tralia
Hon
g K
ong
Taiw
an
MS
CIA
sia
ex J
apan
Sin
gapo
re
Mal
aysi
a
Thai
land
Phi
lippi
nes
Indi
a
Indo
nesi
a
-17.4-10.4
-8.2
-7.7
-4.8
-4.2
-4.1
-3.2
-0.1
1.8
-16-15-14-13-12-11-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4
USD/INR
USD/IDR
USD/PHP
USD/MYR
USD/THB
USD/SGD
USD/KRW
USD/TWD
USD/HKD
USD/CNY
% returns YTD
Source: Bloomberg, Credit Suisse
Source: Bloomberg, Credit Suisse
ALTHOUGH THERE ARE VULNERABILITIES;
ASIA WILL NOT FACE 1997 AGAIN
VIEWS 6 INVESTMENT
1997 AGAIN? ASIA
IDEAS 6 INVESTMENT #1 FI: CREDIT, NOT DURATION
In view of current economic environment, do not take duration mismatch risk, for conservative investors invest in:
§ 1-3 years duration (Short dated)
§ Good Quality
AA- to BBB financials and
A to BB non-financials (excluding autos)
§ Could consider - CHF, EUR, GBP and USD.
§ Cash will give near-zero yields in most markets.
§ Debt default rates expected to remain stable in 2014. Corporate bonds of short maturities offers a reasonable yield pick-up versus cash.
§ After the recent rise in yields, valuations of medium-term bonds have improved but rate volatility is likely to remain very high.
§ Conservative investors should continue to focus on short (1-3 year) investment grade bonds.
Fixed Income
IDEAS 6 INVESTMENT #2 EQUITIES; TAKE PROFIT
§ Global growth is likely to accelerate.
§ The US clearly remains the leader of the recovery and exposure to the US is the cornerstone of the recovery theme.
§ However, due to increased short-term risks and a strong performance, take profit in US consumer and US recovery stocks.
§ European economic data are looking on the positive side. European stocks may start to look increasingly attractive.
§ Asia, wait & watch.
Equities
§ Take profit on US consumer and US recovery stocks.
§ Buy M&A stocks.
§ Lookout for European Recovery Stocks
§ Wait & Watch Asian Equities
IDEAS 6 INVESTMENT #3 DIVIDENDS & BEYOND
§ A defensive theme for investors who are interested in absolute returns and have expectations of relatively high cash flow disbursements from dividends.
§ Fundamental drivers for equity yield remain
§ However, due to current market environment, be cautious to Convertibles.
§ Consider taking profit on the emerging market and APAC at this time due to increased short-term risks.
Equities
§ Selectively buy high-dividend-yielding stocks and stocks generating high free cash flow and hold, but do not add to global convertibles.
IDEAS 6 INVESTMENT #4 GAS & OIL
§ Higher crude oil prices should disproportionately benefit oil and gas companies with new exploration technologies or that have interest in unexploited shale gas, tight oil or deep water oil sources, since these are becoming increasingly attractive and profitable the higher the crude oil price is.
§ Due to the volatile market environment, take profit on this high beta idea at this time.
Equities
§ Take profit on upstream energy stocks.
IDEAS 6 INVESTMENT #5 US REAL ESTATE
§ US homebuilding stocks and real estate investment trusts (REITs) have underperformed in recent weeks.
§ Rising long-term interest rates were the main trigger for the drawdown.
§ This sector is expected to provide positive performance, however, real estate is unlikely to outperform overall stock markets in such an environment.
§ Selectively, US REITs continue to offer attractive investment opportunities to investors looking for defensive dividends.
Alternative Investments
§ Exit listed real estate investments.
IDEAS 6 INVESTMENT #6 THE NEW HARD CURRENCIES
§ In the near term, the high volatility of 10-year US yields is weighing on emerging market currencies.
§ An improvement in the external environment and the now higher carry should attract renewed capital inflows.
§ CNY still has upside potential, but is nearing a peak.
§ Diversify into only a few selected emerging market currencies.
Foreign Exchange
§ Hold selected emerging market currencies funded in EUR, USD or GBP..
IDEAS 6 INVESTMENT
ARE GATHERED FROM VARIOUS SOURCES.
Investors should NOT consider this presentation as solicitation for any investment products. Aprikot is not involved in any business of selling or buying securities or any investment products. The investment ideas are
personal ideas of the presenter, who is not a broker nor a financial advisor. Investments carry risks.