Aslew of economic data out of Asia in the last week present an interesting contrast and, shall we dare say, a worrying contrast. In recent columns, I had pointed out that the risk of growth stagnation coupled with inflation was a non-trivial risk for Asia. It is too early to say that that risk has arrived at the doors of Asia, but the signs are there.
Uncertain future clouds buoyant export numbers:
First, external trade data out of Asia do not seem to capture the global slowdown that is in train these days. South Korean export data for August show a decline from the highs of July, but are still in line with the average export numbers for the second quarter. Moreover, year-to-date, export numbers are running well above the corresponding numbers in 2010. Of course, country-wise breakdown of exports for the first three weeks of August shows a precipitous slowdown from July. Therefore, one must conclude that exports picked up in the last 10 days of the month.
Also Read | V. Anantha Nageswaran’s previous columns
Similar is the tale of exports from Thailand and India. In fact, Indian export growth was a whopping 81.8% year-on-year in July. Thai July export data show an increase over June and the trade balance has improved as well.
We reckon that these export numbers will taper off in the remaining months of the year. That is what we have to watch out for in the remainder of 2011.
The HSBC Manufacturing Purchasing Managers’ Index (PMI) dropped to below 50 (from 51.3) for South Korea and to 45 for Taiwan (from 46.1), in August. The exception was China where PMI rose to 49.9 from 49.3 in July. But it is below the critical expansion level of 50. Business sentiment index for Thailand slipped to around 51 in July from 53 in June. This, too, portends weaker export growth for the rest of 2011. Of course, in the case of Thailand, it can be explained by uncertainty surrounding the election to the national parliament held in July. North-East Asia is at a higher risk of weaker growth than South-East Asia. The latter is buoyed by domestic credit and consumption growth.
Loose monetary conditions in Singapore:
Growth in loans and advances by Singapore banks continue their vertical climb out of the low level seen in October 2009. Annual growth rate accelerated to 27.8% in July from 26.2% in June. Banks are still lending to businesses for building and construction and to individuals for housing. This is not good news. This late-cycle surge will lead to a bad hangover for Singapore banks and for businesses in 2012, not to mention the excess supply of office and residential buildings that would follow in its wake.
For now, this signals that monetary conditions are too loose in Singapore. Of course, there is little that Singapore can do, except to use moral suasion on banks, given its open capital account and its keenness to develop the island-state as a global centre for private banking and financial services.
Accelerating and sticky inflation:
In the meantime, inflation data in Thailand, South Korea and India would have made policymakers uncomfortable. Core inflation is at around 4% in South Korea and 3% in Thailand. The headline inflation rate is over 5% in South Korea and over 4% in Thailand. Weekly data on the annual inflation rate in food, primary articles, and power and lighting in India showed them all to be in double digits.
In sum, as we peer over the Asian cyclical landscape for the rest of the year and next, we see early signs of export weakness and entrenched signs of inflation.
This macro backdrop is not encouraging for Asian stock markets, but it is good news for Asian currencies. In spite of relatively better prospects, the two leading South-East Asian markets—Thailand and Indonesia—are not cheap. In fact, Indonesia is egregiously expensive. Thailand is only slightly more expensive based on the price-book (P/B) measure compared with its 14-year average. Singapore’s P/B ratio is marginally below the long-term average. China’s P/B ratio is below the long-term average. But banks dominate China’s index and they face an uncertain two years ahead, at the minimum. India’s P/B ratio is well below its long-term average and Indian stocks have entered the accumulation zone.
Bare Talk reckons that Asian policymakers would realize the futility of seeking export growth in the face of structural growth constraints in the West. Instead, they will pay more attention to the risks to social stability arising from persistent and accelerating inflation. This augurs well for Asian currencies in 2012.
Investors may have to actively evaluate Asian local currency bonds that are based on solid credit fundamentals not only to benefit from currency appreciation, but also as an avenue to deploy the money that they would be or should be withdrawing from the stock markets.
V. Anantha Nageswaran is an independent macroeconomic and investment strategy consultant, based in Singapore. Your comments are welcome at firstname.lastname@example.org