Currency outflows to a region that is no longer a safe haven
Collectively, the countries of East and Southeast Asia have mainly themselves to blame for weaknesses of their currencies and the low valuation of their stock markets compared with North America.
Since the outbreak of the Covid-19 crisis, there has been an exodus of billions of dollars in western equity investments from Asian markets. What may be needed now is for Asian investors sitting on still relatively pricey US stocks, and even pricier Treasury bonds, to sell and bring the cashback to an Asia which is relatively cheap and still promises far better longer-term returns.
However, convincing them may be difficult while some countries try to ape developed ones with lockdowns and closures which provide little health protection but immense economic damage, particularly to all trade, domestic and foreign, and to lower-income groups.
Just look at the picture. Japan, South Korea, Taiwan and China have all been running current account surpluses for years, some of a massive scale. In Southeast Asia, Singapore persistently enjoys a double-digit current surplus as a percentage of GDP and Thailand and Malaysia have had consistent persistent surpluses since the Asian crisis of 20 years ago. Only since the Covid-19 crisis has brought chaos to the region are those surpluses likely to disappear – and even that is questionable as imports as well as could fall as much as receipt from goods exports and tourism.
Meanwhile, the Philippines also had years of surplus until 2018 and Indonesia’s deficit has been steady at what should be a comfortable level. Vietnam, once troubled by huge swings in its external position, has been in surplus.
The fact is that for years surpluses generated in Asia have been flowing westward, or to Australasia. Partly this is because countries have kept building foreign exchange reserves which means a focus on liquid assets and hence US dollars and to a lesser degree euros, yen and a few other developed country currencies. However, there has in most cases also been net private capital outflow.
Much of this is hard to track statistically. However, Singapore’s Temasek, though a government-linked company, operates more like a private investment fund. At the last count, it had 26 percent of its investment in Singapore, 26 percent in China and only 14 percent in the rest of Asia combined. That is hardly a vote of confidence in the future of either the developed Asian economies or faster-growing ones like India and Indonesia.
At Singapore’s giant Government Investment Corporation which manages its foreign reserves, little of its 44 percent in cash and bonds is likely to be in developing Asia and equity investments (other than private equity) in all emerging markets are just 18 percent of its portfolio.
Malaysia meanwhile has for years had large-scale capital outflows driven by social and political issues. Most of this is directed at supposedly safe havens in the west and Australia. About half of Thailand’s direct investment has been going to ASEAN neighbors but some of the biggest companies meanwhile have been investing their oligopoly profits buying heavily overseas, most recently the US$10 billion buyout of the local retail interests of the British supermarket chain Tesco by CP Group.
Hong Kong’s property giants such as Li Ka-shing’s Cheung Kong group have long had most of their non-Hong Kong assets outside Asia – power in Australia, oil in Canada, telecoms and utilities in Europe and ports in many countries.
The Philippines’ limited attraction to foreign investors has meant that the outflow from high-income groups for buying real estate and stocks in the west has meant that its overall capital account surplus has been minimal. Like Malaysia, a constant large deficit under “Errors and Omissions” reflects unrecorded capital outflow and goods inflow (is smuggling).
Other flows come via pension and insurance funds, mostly private, whose investment managers may have a cultural bias towards the best-known western markets, preferring the US to, for example, Sweden as well as the west to Asia in general.
Company size and equity market liquidity is also an issue which often works to the disadvantage of Asian companies dominated by family ownership levels which limit trading and with managements which put family interests before those of the outside shareholders. Big funds are accustomed to dealing in large sums rather than spread thinly over a number of smaller companies whose prospects may be better.
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