Research & Insight

MSCI Asia ex Japan gained 3.78% in April, against a backdrop of disappointing economic data out of the US suggesting economic activity is slowing (Q1 real GDP growth in the US slowed to 1.8% in 1Q 2011). S&P also downgraded the US debt outlook. We continue to see efforts by Asian policymakers to control inflation with several central banks continuing to tighten monetary policy during the month.

After starting 2011 with weak performance in January, emerging markets debt bounced back, finishing the quarter up over 3% in US dollar terms. Strong growth, high commodity prices and easy monetary policy in the US and Eurozone have led to strong investor demand for emerging markets assets. The quarter has been notable for some very big global events such as the ongoing political conflict in the Middle East and North Africa, as well as the Japanese earthquake and subsequent tsunami. While these have had only an indirect effect on local currency emerging markets debt, mainly through the spike in the oil price, they have contributed to a rise in market volatility.

A schizophrenic quarter. The first 6 weeks saw good economic news (continued recovery in the United States and stability in the Euro-zone) but falling markets. The second six week saw multiple economic and political upheavals, especially in Libya and Japan. Somewhat perversely markets reversed all their losses during this time to end the quarter at their high with a modest overall 2% rise. The resilience of markets highlights again the power of cash – and low interest rates. Given events of the quarter it was more predictable that Egypt (-23%) proved the worst market – and that oil-rich Russia (+16%) was the best. Most of the larger markets were bunched closely in a range of gains between 3% and 7%. Only oil-poor Turkey and India fell outside that range.

The first quarter of 2011 has been eventful, marked by unrest in the Middle East and an earthquake disaster in Japan. During this time oil prices have risen sharply from the low $90s to nearly $120 by the end of the quarter. This further stoked fears of inflation and consequent tightening measures within our region. Meanwhile our markets underperformed developed markets and witnessed a significant rotation of investment outflows in favour of the latter. Following on from the latter part of 2010, macro data continued to be more positive than previously feared.

Since the beginning of 2011, 8 savings banks have been ordered by the Financial Supervisory Service (FSS) to halt their business for 6 months due to poor asset quality. Poor asset quality resulting from poor risk management on the lending side – heavy exposure to project financing (PF) loans – much of which have been negatively affected by the meltdown in the real estate market and the global financial crisis. The suspended savings banks’ BIS ratios (bank for international settlements) are reported to be less than 5% or negative.