North Asia flows dwarf Asean, but FX appeals

Fidelity sees North Asia’s dominance as based on valuations, while Crédit Agricole favours Asean from an FX appreciation perspective – but fears a currency war has already started.
North Asia flows dwarf Asean, but FX appeals

North Asia remains the darling of global investors, although they should not ignore currency opportunities in Asean markets even amid fears of a currency war.

North Asia saw net fund inflows of $40 billion between July last year and January this year, taking cumulative inflows over the past decade to $140 billion.

By contrast, Asean saw $10 billion in fund inflows for the six-month period to January this year, taking its tally to around $30 billion since January 2003.

UK-based manager Fidelity Worldwide Investment suggests that it is valuations in South Asian markets which have put investors off.

In a November note last year it highlighted above-average price-to-earnings ratios in Thailand, Indonesia and Philippines, with Thailand at a P/E of 15.7x against a long-term average of 12.8x.

“There is a risk that if there is some kind of blow to the market and some kind of redemption – which we haven’t seen so far – it could come more from Asean-related stories,” says Fidelity equities investment director Medha Samant.

She is selective on Asean countries, noting Thailand relies heavily on foreign direct investment to drive GDP growth. In 2011, Japan alone accounted for over 50% of FDI into Thailand, much of it headed to the manufacturing sector, including autos.

But Fidelity is more positive on Asean banks, which have high capital ratios and have been able to gain market share as European peers pulled out of the region to preserve capital.

By contrast, it is underweighting Chinese banks amid deregulation worries. Portfolio manager Martha Wang notes: “As the system is deregulated, companies will have access to other forms of capital, including international bond markets. This means the market share of money-lending for state-owned banks will erode over time and their pricing power will decrease.”

But in terms of Asean currencies, Crédit Agricole Private Banking is particularly bullish on the Malaysian Ringgit, which it forecasts to appreciate by almost 9% between now and December 2014.

Speaking at a press gathering this week, Victor Choi, the firm’s head of markets and investment solutions, spoke with optimism about Malaysia’s plan to transform itself into a high-income country by 2020.

A cornerstone of this plan is 131 infrastructure projects, including a high-speed railway that will connect Singapore and Kuala Lumpur.

But the bank is underweight the yen, which has depreciated almost 12% against the dollar between end-December and the start of March, by Bloomberg data.

Davis Hall, its global head of FX and precious metals, sees this as the first shot fired in a global currency war, which he expects to escalate even amid rhetoric from the Group of 20 major economies that they will refrain from “competitive devaluations”. “The currency war for me has already started,” says Hall.

He is concerned about currency retaliation from rival export-orientated countries that feel Japanese actions will make their products less competitive in the global market.

In contrast to the yen, the Korean Won, Singaporean dollar and Taiwanese dollar have increased by 8%, 5% and 4% respectively over the same period.

“All of a sudden, their products just got more expensive for Americans relative to yen products, [which] have improved in terms of their price,” notes Hall. “This is why I think there is a lot of jealousy and anger and why I think there could be a lot more tension.”

In late January, South Korea’s Choi Jong Ku, deputy finance minister, said the country should consider imposing tax on currency and bond trading to limit speculative capital inflows.

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