Why Asia's Emerging Markets Are Looking Better Than Their Peers


Asia wasn’t spared when investors soured on emerging markets around the world in late April, a shift driven by the dollar’s resurgence.

Stocks in Malaysia and Indonesia have tumbled in recent months. Several Asian currencies have depreciated against the dollar this year, including the Indian rupee and Philippine peso. Government bond yields have surged, with the 10-year yield in Indonesia shooting up to 7.28% from 6.31% at the end of December.

But investors say Asia’s emerging markets look stronger than some of their peers, thanks to actions they have taken since the 2013 “taper tantrum,” when investors fled emerging markets after the Fed signaled it was getting closer to reducing stimulus. Those moves have bolstered central-bank credibility in the region. That hasn’t happened to the same degree in Argentina or Turkey, the two countries at the center of this spring’s emerging-market turmoil.

The relative comfort with emerging Asia’s central banks and improvements in the region’s economic weak spots, such as inflation and current-account balances, have started to lure some long-term investors back.

“Our marginal dollar is going into Asia,” said Eric Wong, a fixed-income portfolio manager at Fidelity International in Hong Kong. “That’s where we’re pivoting.”

The latest monthly figures still point to sharp outflows from Asia in both April and May. Foreign investors pulled an estimated net $8 billion from emerging Asian stocks and bonds last month, making it the region hit worst by the exodus of cash, according to the Institute of International Finance.

The scale in part reflects Asia’s habitual dominance of foreign portfolio flows into emerging markets: The region posted the biggest net outflows or inflows into those markets in 19 of the past 24 months through May, according to the IIF’s data.

The region’s central banks have leapt into action in recent weeks following a surge in oil prices and the dollar’s rebound, which makes it more expensive for countries to repay dollar-denominated debt.

India raised its main landing rate to 6.25% from 6% for the first time in more than four years last week. The Reserve Bank of India said it lifted its key rate because of a rise in inflation—which it has targeted since 2015—and that it had room to respond to risks to its inflation outlook.

“The central bank is gaining credibility by raising [rates] when inflation is rising … rather than succumbing to what the government might want, like keeping rates low ahead of elections,” said Karan Talwar, investment specialist for emerging markets fixed income at BNP Paribas Asset Management in Hong Kong.

Indonesia’s central bank last month raised rates twice in less than two weeks to stem the slide in its currency, the rupiah. In prior years, such rapid moves might have looked like panic measures. But Bank Indonesia held a call with investors just a few hours after that second meeting, demonstrating an improved communication strategy since the taper tantrum, said Roland Mieth, an emerging-markets portfolio manager at Pacific Investment Management Co. in Singapore.

Investors say the recent interest-rate decisions in Asia, especially in Indonesia, should help stave off destabilizing currency swoons, which is what happened before Argentina and Turkey’s banks were forced to act.

“Indonesia is a reflection of what emerging markets are graduating into,” said Jens Nystedt, a senior portfolio manager at Emso Asset Management in New York.

Turkey’s central bank raised its benchmark interest rates last week in a move that briefly lifted the lira from near-record lows. However, market participants continue to question the bank’s independence since President

Recep Tayyip Erdoğan,

who opposes higher rates, said he wants a bigger say in monetary policy if he wins elections on June 24.

Asian stock markets’ skew toward technology stocks is another factor that could help buffer them from broader emerging-market swoons, given investors’ ardor for the sector. Tech shares, including the likes of

Alibaba Group Holding
Ltd.

and

Tencent Holdings
Ltd.

, recently had a 27% weighting in the MSCI’s Asia Pacific index excluding Japan, which includes stocks from emerging economies such as China, India and Indonesia—higher than the 18% tech weighting for MSCI’s world index.

Countries with twin deficits—in their budget and current account—could still be vulnerable to investor outflows when sentiment turns on emerging markets, regardless of their central-bank policies. Those with high levels of foreign asset ownership in Asia, such as Indonesia, are especially sensitive to foreign capital flight.

Investors are also considering what Malaysia’s election last month, which

Mahathir Mohamad’s

opposition party surprisingly won, means for its fiscal outlook. Mr. Mahathir has since scrapped a goods-and-services tax and pledged to implement a new sales tax that is expected to bring in less revenue, which could threaten its ratings from ratings firms, said Mr. Mieth from Pimco.

Fidelity International’s Mr. Wong said one reason he has become more positive on Asia is that higher yields could start to attract local investors back into the market, especially cash in China that is sitting on the sidelines.

“A lot of Asian investors buy their own debt in Asia, and that’s a very strong technical that you don’t find in Latin America, where there are a lot of tourist investors,” said Mr. Wong from Fidelity International. “They are the first ones to bail when the party’s over.”

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com



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