Economic growth in Asia remains strong and is gathering pace. Vietnam and India are experiencing the most significant growth, with rates exceeding 8%. Singapore and Malaysia are also growing at over 6%. Thailand and South Korea are at the bottom of the list, with stable growth or an upward trend. However, these markets are significantly more developed than the aforementioned ones, resulting in a lower multiplier for future growth.
It is no surprise that the stock markets in these countries have once again outperformed the indices in the US and Europe this year. This suggests that less capital is flowing out of Asia into Western stock markets, and that more money is probably flowing from the US and Europe into Asia. These portfolio flows have only just begun to increase, but they are already causing Asian currencies to strengthen against the US dollar and, at times, the euro too.
The downward trend of the USD gained brief momentum in January, but has recently returned to calmer waters against the euro. Should the euro resume its upward movement, it would also tend to strengthen against most Asian currencies. However, I expect exceptions against the JPY and KRW, which are still significantly undervalued compared to the euro. The yen and the won are likely to be the strongest currencies over the next two years. It is only when these two currencies start to move upwards that we can expect the next significant depreciation of the USD. Japan is the world’s largest capital provider. However, after forty years of capital exports due to low interest rates in Japan and poor corporate governance among Japanese companies, recent developments have brought about a significant change.
Japan currently has interest rates that are roughly equivalent to those in Germany. This raises the question for Japanese pension funds as to whether it makes sense to invest abroad and accept the associated currency risks. Decisions that affect 100% of Japan’s GDP are not made overnight. However, once the ball starts rolling, the consequences can be enormous. Even if only 10–20% of the invested volume flows back to Japan, this could trigger significant market movements. This is entirely possible because not all Japanese investors are risk-averse or particularly skilled at trading derivatives.
Although India Continues to Grow, the Stock Market Will Continue to Have an Impact on the Economy
India is a good example of how little a positive interest rate differential versus significantly lower inflation helps when there are portfolio outflows. Its stock markets have underperformed over the past two years and remain highly valued.
However, I assume that positive real economic development, combined with the currently undervalued INR, will encourage bond investors to become less cautious and invest in India’s increasingly broad and diversified bond market. This should help to stabilise the currency, at least against the USD. Nevertheless, the high correlation between the INR and the USD means that USD weakness due to weakness against the euro will continue to have an impact. Rather than hedging the INR directly at a high cost, it is more cost-effective to map the intrinsic residual risk using a macro hedge via EUR/USD.
