Emerging
Asian equity markets could gain momentum in coming months as the mix of
quantitative easing and market-friendly policy reforms dovetail with
sharply falling oil prices. Lower energy costs are not only a boon to
Asia’s local economies, but also serve up what is in essence a worldwide
tax cut, which could boost global consumption - and thus profits – for
the region’s export-oriented manufacturers. The depth of the plunge,
which came as a surprise, was not baked into equity analyst estimates or
corporate guidance of these companies. That leaves room for upside in
emerging Asian markets to build on previous boosts from macro policy,
although there are risks should those policies fail to take hold.
A boon for oil-dependent countries
The economic boost to emerging Asian countries could be significant. Oil prices dropped 18 percent in November—the largest monthly loss in almost six years—with WTI crude bottoming out at $63.72, and extending a sustained, $30 drop over
the last six months. That transfers to consumer pockets: The IMF estimates that every 10 percent drop in the price of oil potentially results in a 0.2 percent boost to global GDP. Another way of looking at it: A $40 fall in oil prices represents a shift of approximately $1.3 trillion, 2 percent of world gross output, from oil producers to global consumers. That is good news for emerging Asia’s largest economies, which have historically been reliant on both oil imports and consumer exports. It should bode well for the markets as well. China, India, South Korea and Taiwan account for more than 55% of the MSCI Emerging Markets Index.
China, the world’s largest importer of oil, relied on imports to meet 57.4 percent of its crude consumption in 2013. As the nation’s oil bill shrinks—it spent $16.42 billion on crude in November, down from $18.43 billion in 2013—the resulting trade surplus is the equivalent of $2.2 billion in savings for every 1 percent drop in crude price. For South Korea, where oil accounts for 30 percent of total imports, the 10 percent decline in crude oil prices translates into GDP growth of 45 basis points, for a projected economic growth of 3.5 percent in 2014 and 3.6 percent in 2015.
Similar market forces have been on display in Taiwan, which saw tech-driven exports rise 3.2 percent, resulting in a trade surplus of more than $22 billion in the first 10 months of this year. In a country that relies on imports for more than 99 percent of energy consumption, oil accounts for more than 25 percent of total imports. In India, where oil represents one-third of all imports, cheaper energy is helping to drive down inflation to 6.5 percent—a 3.5 percent drop from early 2013—hinting at a lower budget deficit and increased domestic investment.
These nations have already reaped substantial benefits from the drop in oil prices, and this six-month bear market shows signs of continuing. Brent crude hit a new five-year low on Dec. 8, and some analysts forecast oil to reach $60 in the near term. Even with futures contracts predicting a slight rebound in 2015, this sustained slump should only brighten the economic outlooks of such energy importers.
The power of reforms
Lower fuel prices don’t tell the whole story, of course. They come at an opportune moment for Asia’s markets and fiscal reformers, who have been pushing aggressive -- and often controversial -- initiatives to jumpstart growth across the region. In India this has translated into political capital for new Prime Minister Narendra Modi. Elected on a pledge to revive Asia’s third-largest economy via energy security, Modi has used the slumping price of oil as a lever to reduce the burden of energy price subsidies on the nation’s economy. Freeing diesel prices from state control for the first time in a decade will likewise help close current account deficits, making the country less vulnerable to external monetary dynamics, like those from the U.S. Fed.
Elsewhere, declining oil prices come to South Korea at a time of accelerating shareholder-friendly policy momentum aimed at unlocking captured corporate cash. Acting on promises made last summer to encourage companies to increase the country’s relatively low dividend payouts, Korea recently passed a bill taxing undistributed corporate profits while also cutting the dividend income tax rate, thus encouraging companies to share more of their earnings with investors.
Governments lubricating stimulus
Finally, central banks have played a role in lifting Asia’s emerging economies. On the heels of Japan’s most recent round of quantitative easing, China countered with a stimulus of its own. In a Nov. 21 announcement, the People’s Bank of China cut its one-year benchmark deposit rate from 3 percent to 2.75 percent, a move that spurred a global rally. While the central bank surprised many analysts with the rate cut—its first since July 2012—many traders who are bullish on China anticipate further reductions, and a subsequent stimulatory effort for the world’s second-largest economy.
Similar action occurred in South Korea, where new Finance Minister Choi Kyung-hwan has already overseen two .25 percent cuts to the interbank loan rate since his appointment in June. Not only do many fixed-income traders anticipate that the Bank of Korea will further cut interest rates as a preemptive response to possible deflation, but there is also speculation that the new central bank chief could launch the nation’s first bond-buying program, in 2015. Should he make that move, South Korea would become the first emerging-market country to engage in quantitative easing.
There are risks for investors, to be sure, among them uncertainty about the ability of the region’s programs and reforms to sustainably boost economic growth. And South Korean stocks have been knocked down by worries about a global slowdown. Also crucial to the region’s continued success is China’s ability to avoid a hard landing. But overall, the region's prospects are looking bright.
*[Source FT–Dec. 3–Martin Wolf]
*Source of information in this story is Bloomberg, as of 12/2014, unless otherwise noted.
Three Reasons to Consider EM Asia
Looking Overseas to Find Value
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. iS-14181-1214
A boon for oil-dependent countries
The economic boost to emerging Asian countries could be significant. Oil prices dropped 18 percent in November—the largest monthly loss in almost six years—with WTI crude bottoming out at $63.72, and extending a sustained, $30 drop over
the last six months. That transfers to consumer pockets: The IMF estimates that every 10 percent drop in the price of oil potentially results in a 0.2 percent boost to global GDP. Another way of looking at it: A $40 fall in oil prices represents a shift of approximately $1.3 trillion, 2 percent of world gross output, from oil producers to global consumers. That is good news for emerging Asia’s largest economies, which have historically been reliant on both oil imports and consumer exports. It should bode well for the markets as well. China, India, South Korea and Taiwan account for more than 55% of the MSCI Emerging Markets Index.
China, the world’s largest importer of oil, relied on imports to meet 57.4 percent of its crude consumption in 2013. As the nation’s oil bill shrinks—it spent $16.42 billion on crude in November, down from $18.43 billion in 2013—the resulting trade surplus is the equivalent of $2.2 billion in savings for every 1 percent drop in crude price. For South Korea, where oil accounts for 30 percent of total imports, the 10 percent decline in crude oil prices translates into GDP growth of 45 basis points, for a projected economic growth of 3.5 percent in 2014 and 3.6 percent in 2015.
Similar market forces have been on display in Taiwan, which saw tech-driven exports rise 3.2 percent, resulting in a trade surplus of more than $22 billion in the first 10 months of this year. In a country that relies on imports for more than 99 percent of energy consumption, oil accounts for more than 25 percent of total imports. In India, where oil represents one-third of all imports, cheaper energy is helping to drive down inflation to 6.5 percent—a 3.5 percent drop from early 2013—hinting at a lower budget deficit and increased domestic investment.
These nations have already reaped substantial benefits from the drop in oil prices, and this six-month bear market shows signs of continuing. Brent crude hit a new five-year low on Dec. 8, and some analysts forecast oil to reach $60 in the near term. Even with futures contracts predicting a slight rebound in 2015, this sustained slump should only brighten the economic outlooks of such energy importers.
The power of reforms
Lower fuel prices don’t tell the whole story, of course. They come at an opportune moment for Asia’s markets and fiscal reformers, who have been pushing aggressive -- and often controversial -- initiatives to jumpstart growth across the region. In India this has translated into political capital for new Prime Minister Narendra Modi. Elected on a pledge to revive Asia’s third-largest economy via energy security, Modi has used the slumping price of oil as a lever to reduce the burden of energy price subsidies on the nation’s economy. Freeing diesel prices from state control for the first time in a decade will likewise help close current account deficits, making the country less vulnerable to external monetary dynamics, like those from the U.S. Fed.
Elsewhere, declining oil prices come to South Korea at a time of accelerating shareholder-friendly policy momentum aimed at unlocking captured corporate cash. Acting on promises made last summer to encourage companies to increase the country’s relatively low dividend payouts, Korea recently passed a bill taxing undistributed corporate profits while also cutting the dividend income tax rate, thus encouraging companies to share more of their earnings with investors.
Governments lubricating stimulus
Finally, central banks have played a role in lifting Asia’s emerging economies. On the heels of Japan’s most recent round of quantitative easing, China countered with a stimulus of its own. In a Nov. 21 announcement, the People’s Bank of China cut its one-year benchmark deposit rate from 3 percent to 2.75 percent, a move that spurred a global rally. While the central bank surprised many analysts with the rate cut—its first since July 2012—many traders who are bullish on China anticipate further reductions, and a subsequent stimulatory effort for the world’s second-largest economy.
Similar action occurred in South Korea, where new Finance Minister Choi Kyung-hwan has already overseen two .25 percent cuts to the interbank loan rate since his appointment in June. Not only do many fixed-income traders anticipate that the Bank of Korea will further cut interest rates as a preemptive response to possible deflation, but there is also speculation that the new central bank chief could launch the nation’s first bond-buying program, in 2015. Should he make that move, South Korea would become the first emerging-market country to engage in quantitative easing.
There are risks for investors, to be sure, among them uncertainty about the ability of the region’s programs and reforms to sustainably boost economic growth. And South Korean stocks have been knocked down by worries about a global slowdown. Also crucial to the region’s continued success is China’s ability to avoid a hard landing. But overall, the region's prospects are looking bright.
*[Source FT–Dec. 3–Martin Wolf]
*Source of information in this story is Bloomberg, as of 12/2014, unless otherwise noted.
Three Reasons to Consider EM Asia
Looking Overseas to Find Value
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. iS-14181-1214
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