The Asia Pacific ex Japan region is much less negatively impacted by higher US interest rates than has been historically the case, according to several experts on the region.
Jane Andrews, founder of Asia-focused fund house BambuBlack Asset Management has been investing in Asia Pacific equity markets since the late 1990s when a sovereign debt crisis upended markets and she says crisis was partly the consequence of changes in global credit conditions.
Such conditions have also occurred over the past year, as the US Federal Reserve lifted rates in order to combat inflation.
Andrews acknowledged historically higher rates in the US were negative for emerging markets since they typically mean the yield on US Treasuries rises, as those assets are regarded as the risk free rate of return around the world.
A higher yield on Treasuries makes riskier assets such as emerging market equities less attractive, and so investors will be inclined to withdraw their capital from there.
Additionally, many emerging market companies and countries are able to borrow only in dollars, higher US interest rates push the cost of repayments higher, reducing the capital available for those companies and countries to grow.
But Andrews said: “This was definitely the case in the past. But much less so now. Sentiment towards the asset class is still impacted by US rates, but the fundamentals are different, there are far more domestic buyers and investors in these economies and so far more of the debt is issued in local currencies.
"I think they learned a lot of lessons from the Asia sovereign debt crisis. Most Asia Pacific countries also have pursued orthodox monetary policy in recent years, and didn’t deploy quantitative easing.”
As an investor in the region, she first visited China in 1991. Referring to that time period, she said: “The factories then were like something from the dark ages, and there were bicycles everywhere. Now it has amazing infrastructure and is a world leader in electric vehicles.
"But it looks as though the working age population peaked there in 2014 or 2015. One of the issues for an investor looking at China is that companies and government agencies there had to invest to meet central targets, which meant some capital was deployed inefficiently. The truth is that in 1991, neither India nor China were investible.”
She said she believes India is “16 to 18 years” behind China when it comes to industrialisation, a factor she puts down to India being a democracy while China can plan centrally but she believes the lack of central targets may mean the "quality" of the growth in India may be higher than in China.
Guy Miller, chief market strategist and economist at Zurich, said one of the factors which has led to the fortunes of Asian markets becoming detached from the level of US interest rates has been that central banks , specifically in Latin America tightened monetary policy before to the US, which meant they had not been as reliant on the Federal Reserve bringing down inflation.
He adds that the Asia Pacific region is still very sensitive to the global manufacturing cycle, and to Chinese demand.
Miller said: “It looks as though the slowdown in global manufacturing has bottomed out, while we are constructive on the Chinese economy from here. I would also say that while dollar strength has been a headwind for emerging markets, I think that will reverse as we are likely to see a decline in the dollar as economic growth slows."
david.thorpe@ft.com
