Region Analysis:

Trend #1 – Consequences of the Trade War

The ongoing US-China trade war creates major concerns for investors as Asia’s economic conditions face uncertainty at this point. US has imposed tariffs on more than $250 billion worth of Chinese goods, resulting in a decline of Chinese equities and depreciation of the Chinese Yuan. US also plans to increase its tariffs on automotive imports by about 10 times, leaving Japanese economy at a risk since automobile accounts for 80% of US deficit with Japan.

The impact of trade war has been significant across Asia-Pacific countries, keeping commodity prices, currencies and global equities low. Indian rupee and Indonesian rupiah has plummeted. If currencies continue to fall, we could expect interest rates to increase, further causing possible financial stress and poor economic performance in the region.  We expect economics dynamics in Asia-Pacific could change with disruption in global supply chains and price instability. On average, stock indices in Hong Kong, Japan and Australia have been ending low for the past months since the trade war. Yet, trade war could bring positive light to some ASEAN countries. Following uncertainty in China’s economic situations, some companies in the fashion industry have already invested and established a spot in Cambodia and Vietnam’s markets. With tensions between US and China, Hong Kong also sees a chance to begin developing a new market relation with other ASEAN countries.  In fact, trading within Asia has strengthened over the years as China and South Korea advance to develop strong trade relations with ASEAN areas and India respectively.

Trend #2 – Currency Crisis in Emerging Markets

The trade-wars between United States and China coupled with the Fed’s rate hike have cajoled global investors to chase greenbacks instead of emerging market currencies. The currency crisis began in Turkey and Argentina but spread to Brazil, India, South Africa, Russia, Indonesia, and Philippines. The Indian rupee plummeted to an all-time low of 72.97 against the USD and has lost 13 percent of its value. Since April 2018, the Reserve Bank of India (RBI) has spent around $25 billion along with increasing interest rates by 25 basis points in a futile attempt to stabilize the currency. Depreciating rupee and rising oil prices have widened the current account deficit which is further expected to widen to 2.5 percent of the GDP. Depreciating rupee has also dented market sentiments. The S&P BSE Sensex fell 500 points below its crucial support placed at 38,000 while the Nifty dropped 100 points to fall below 11,400. The Indonesian rupiah slumped to the lowest level since the 1998 Asian Financial Crisis. Against the dollar, the rupiah dropped to 14,933 and lost 9% of its value. The benchmark Jakarta Composite index fell 3.8% to 5683.5, its biggest one-day drop since November 2016. Having said that, India and Indonesia have many instruments to stabilize their currencies. The RBI is expected to have two more interest rate hikes. Furthermore, it has an excess of $400 billion in reserves. According to a State Bank of India report, the RBI can sell an additional $25 billion to curb the currency fall. Finance Minister Jaitley said that the government will take measures to reduce ‘non-necessary’ imports and ease overseas borrowing norms for the manufacturing sector. These measures should stabilize the Indian rupee. Indonesia has also taken several steps in response to the market rout. Bank Indonesia has increased interest rates four times by a total of 1.25 percentage points and has drained foreign reserves by almost 10 percent. The government has also taken steps to curb imports and maintain a current account deficit of 3 percent of GDP. It has decided to postpone or restructure its $25 billion 35,000-gigawatt electricity project which relies on imported components. This move would save around $8-10 billion in import costs. Moreover, the government has ordered mining companies to repatriate their export earnings to bolster the country’s dollar supply. The IMF has backed Bank Indonesia’s policy measures saying that they were appropriate to reduce volatility.

Trend #3 – Promising Economic Growth

In PPP terms, Asia-Pacific region takes up 40% of global GDP shares with its global output rising to 42.6% in the last quarter. China, India and Japan economies made up 70% of Asia-Pacific global GDP shares. Overall unemployment in most parts of the region has declined, showing promising signs on the labor force. Japan kept a low unemployment rate at 2.2%. Despite a decrease in GDP growth compared to last year and tensions due to the trade war, Japan economic conditions appear promising. The economy is witnessing more demand from its domestic market. Import rates increased at a rate of 3.9 % in the last quarter and at a rate of 0.8% for exports. The country continues to see an increase in real consumer spending and business investment at annual rate of 2.8% and 5.2% respectively.

ASEAN countries such as Cambodia is also growing relative to other years with a steady GDP growth rate and unemployment rate. Hong Kong economic conditions stood out as well. After a slight drop in GDP growth in the latest quarter, Hong Kong’s growth rate is expected to improve as its merchandise exports tripled since last year. Adjusted unemployment rate also reached the lowest at 2.8% over the past 2 decades. Within the years, Hong Kong remained in the strong strategic position worldwide, proving itself as one of the largest exporter of services and merchandise, and investor of FDI stock. Trade war is expected to open up more markets and new opportunities for Hong Kong economy.

Trend #4 – Inflation trends

Inflation in Asia-Pacific region has been increasing, especially driven by soaring food and gas/fuel prices. China’s CPI stood at a record of 2.3% as pork prices climbed sharply due to the trade war and supply shock from African swine fever. On average, inflation rates in ASEAN countries have been kept within the range of 2.5 to 3%. Japan’s short-term interest rate has been maintained at -0.1% for an extended period of time. Last year, the country applied aggressive monetary policy in an attempt to stimulate inflation.   Alongside negative interest rates, the Bank of Japan (BOJ) has purchased massive assets. Yet, inflation rates have still been low in the country. In the following years, monetary easing is expected to continue, further promoting economic activity in the country. Japanese bond yields as well as yen have fallen within the months as BOJ continues to keep bond yields under 0.1%. Within the next few years, we expect to see no or little adjustment in the current monetary policy as Japanese economy strives to reach its targeted inflation rates.

Trend #5 – Rise in technology   

The digital economy in Asia-Pacific is blooming with a drastic increase in internet usage such as e-commerce, online media and cloud marketing. However, information technology stocks have dropped this year compared to previous year in Asia excluding Japan. Yet, Japan’s IT shares are advancing with stock demand for videogames companies such as Sony and Nintendo. Asia-Pacific countries such as China, India and Singapore have also been major hotspots for data centers later in the year. Within 3 years, public cloud growth in China could reach up to $2 billion while 25% growth rate is expected in India’s local cloud market. India’s mobile phone market is one of the fastest growing markets, attracting many multi-billion tech companies such as Samsung Electronics. This South Korean company has invested in a manufacturing phone factory in India, showing promising future in the technology industry in the country. As many Asia-Pacific regions transition rapidly into the world of technology, investment in this sector could open more doors and bring favorable results.