A Warning as Markets Cool in Asia
Stock markets in India and a handful of other, smaller Asian countries, which surged last year as foreign investors bet on their fast growth, are starting to remind investors of the risks involved.
The Indian stock market has fallen more than 7 percent from a record high set in November, as investors have grown increasingly concerned about inflation and corruption scandals that have paralyzed the country’s Parliament. The Nifty 50 stock index did close up 1.9 percent on Wednesday, but that came after a six-day losing streak.
Meanwhile, the stock market in Bangladesh, which jumped 96 percent last year, has tumbled 27 percent in recent weeks after regulators tightened rules to limit speculation. That market, which went into a free fall on Monday, setting off riots, recovered some of those losses in the last two days after the government eased regulations to make it easier for investors to borrow money. Stock markets in Thailand, Indonesia and the Philippines have also fallen in recent days, though not as sharply.
The stumble has not extended to more established exchanges in Asian emerging markets. The Hang Seng index in Hong Kong is up more than 4 percent in the last month and more than 8 percent over the last 52 weeks.
And the MSCI Asia APEX 50 Index, a broad measure of Asian stocks excluding Japan, is up 5 percent over the last month and nearly 14 percent over the last 52 weeks.
But the recent pullback in less established and more volatile Asian stock markets serves as a warning to foreign investors who poured billions of dollars into emerging markets last year: in spite of their long-term potential, these fast-growing countries still face numerous challenges.
Many countries are battling high and still-rising inflation, especially in food and energy, and their policy makers are worried about bubbles forming in their financial systems, said Russell Napier, a strategist at the investment firm CLSA in London.
“Inflation will be an endemic problem in the emerging markets,” Mr. Napier said. “We are not going to solve this inflation in a quarter or two quarters.”
In India, prices remain stubbornly high even as the country’s central bank, the Reserve Bank of India, has raised key interest rates by up to 2 percentage points. A recent surge in vegetable prices has put staples like onions beyond the reach of many consumers. Food prices jumped 18 percent at the wholesale level at the end of December, compared with the same period a year ago.
Many analysts, who had hoped that the Indian central bank would not raise rates again, are now expecting policy makers to increase borrowing costs again later this month. That would dampen the country’s growth, which is already showing signs of weakening. On Wednesday, the government reported that industrial production grew just 2.7 percent in November, on a year-over-year basis, down from 11.3 percent in October.
“There is a risk of this becoming the classic situation of low growth and high inflation, where central bankers dither about what to do,” said Samiran Chakraborty, regional head of research at Standard Chartered Bank in Mumbai.
Analysts have also grown concerned about the scope and reach of corruption in the country after scandals have tainted the country’s telecommunications, banking and real estate sectors. A government auditor has estimated thatimproper allocation of wireless spectrum to favored mobile phone companies might have cost the country nearly $40 billion in revenue, compared to what it might have earned through an auction.
While most investors are accustomed to corruption in developing countries like India, the recent scandals suggest that demands for bribes have become more arbitrary and repetitive in nature, said Saurabh Mukherjea, who heads the equity business at Ambit Capital, a Mumbai-based investment firm.
“There has been a fairly decisive change,” Mr. Mukherjea said. “Both domestic and foreign investors have realized that the nature of corruption has been fundamentally altered.”
In the recent sell-off, investors have driven down the price of bank, real estate and energy companies that are more reliant on politicians and bureaucrats. At the same time, they have bid up the price of technology and pharmaceutical companies that earn much of their revenue outside the country and are less entangled with the government.
Investors are also frustrated that scandals appear to have paralyzed the government and policy making in New Delhi. “Everybody was banking on this government delivering big time on the reform process,” said Mr. Chakraborty of Standard Chartered. “And that is not moving.”
Last year, opposition political parties blocked proceedings in Parliament. They are now threatening to disrupt the forthcoming debate on the government’s next budget unless the ruling Congress party allows a parliamentary committee to investigate the telecom scandal.
The individual circumstances of the sell-off in other countries are somewhat different from India’s, but also speak to the growing pains that emerging markets often encounter as they rush headlong into the future.
In Bangladesh, for instance, government efforts to curb speculation in stocks by banks and individual investors led to a sharp sell-off on the Dhaka Stock Exchange in December and earlier this month. Regulators were forced to suspend trading on Monday after the benchmark DSE General index fell 9 percent and investors protesting the decline clashed with baton-wielding police officers.
The market started recovering on Tuesday, after the government reversed some of its recent decisions, making it easier for investors to borrow money to buy shares. But analysts and investors remain concerned that the rebound will be short-lived, because the market is still very expensive relative to corporate profits.