Equity investors should be wary of stock markets in high-growth Asian countries, argues US asset manager BlackRock.
The firm, the world's largest fund management company, observes that high GDP growth does not necessarily equate to stock market returns. In fact often the opposite is true.
Out of 83 developed and emerging markets from 1972 and 2009, those experiencing the lowest growth enjoyed average annual stock market returns of 25%, while nations with high economic growth returned 18%, finds BlackRock research. Countries with medium GDP growth levels fared the worst, returning between 12% and 18%.
These trends appear to hold true today. Shanghai’s CSI 300 Index is down 2.2% from the start of the year to October 14, with GDP growth hovering around 7.5%. That’s in sharp contrast to the US’s S&P 500, which is up 14.6% over the same period against GDP growth of 2.5%.
Companies in emerging nations often prefer to issue shares rather than bonds to raise assets as the region’s fixed income markets remain relatively underdeveloped.
While issuing shares is a quick way of raising money for new companies, this money is not sticky. If returns don’t meet shareholder expectations, they sell.
“[Companies from emerging markets] are fast growing so they form companies quite quickly and your share of the market gets diluted,” Ewen Watt Cameron, chief investment strategist at BlackRock Investment Institute, told AsianInvestor on a recent trip to Hong Kong.“And, of course, not all companies are successful,” he adds, noting that many shut down.
Changes in monetary policy also have a major impact on property and financial firms in emerging economies, two important sectors in regional stock markets.
The US Federal Reserve’s hint in May that it would look to taper its quantitative easing programme led investors to yank billions from emerging markets. Indonesia, for example, was hit hard. Ben Bernanke’s comments, coupled with a depreciating currency – the Indonesian rupiah has depreciated 14% since the Fed’s comments in May – and a widening current account deficit, drove investors to the exits.
Indonesian stocks were down 13.3% to 4,520 as of October 15 from a high this year on May 20 of 5,215.
Indonesia’s central bank raised interest rates to 7.5% in late September, from 6.5%, in an effort to curb risky lending practices and keep a lid on inflation.
This has a major impact on property and financial markets, which rely heavily on interest rates and account for large portions of most emerging countries’ stock markets. In Jakarta, property firms make up 23% of its stock market and financial stocks make up 6%.
Different shareholder rules in emerging economies also impact equity markets, given that minority shareholders often do not have voting rights.
“Because of this, the only way for minority investors to have a say, such as exercising corporate governance, is simply to sell the shares,” notes Cameron. This leads to volatile equity markets in countries that otherwise have tremendous growth.
