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Wealth effect? Why Asia’s missing the boat

Investors check the share prices at a security firm in Shaoxing, China.
ChinaFotoPress | ChinaFotoPress via Getty Images
Investors check the share prices at a security firm in Shaoxing, China.

Emerging Asia may be enjoying a bull run in stocks, but the region may miss out on the "wealth effect" that would spur consumers to increase their spending, analysts said.

A rise in stock prices usually boosts the wealth of investors and the improved sense of financial security tends to bump up consumption, commonly defined by economists as the "wealth effect." This increase in spending theoretically results in higher incomes and profits, which in a virtuous cycle eventually supports economic growth.

Year to date, the MSCI Emerging Asia Index has risen 12.7 percent, trumping the MSCI Asia Pacific Index's 11.05 percent increase and the MSCI World Index's 4.75 percent gain over the same period. Within emerging markets in Asia, China leads the pack with a 37.50 percent jump.

However, consumption rates across the region were less robust. China's retail sales notched up 10.6 percent in the first quarter of 2015 from a year earlier, while Hong Kong saw sales rise 14.9 percent in February, on the back of surging demand sparked by the Lunar New Year. Meanwhile, retail sales in South Korea and Singapore fell 5.7 and 7.4 percent on-year, while Indonesia's annual sales grew 16.5 percent in February.

Slow wage growth

A slowdown in real wage growth to 2.0 percent in 2014 is the main culprit, according to a HSBC report released last week. Average real wage growth was at 3.3 percent in 2013.

"This means households cannot increase their real consumption by as much as before [based on] labor income alone… in particular, workers in Hong Kong and the Philippines reported a decrease in their purchasing power last year," HSBC said.

China also gets singled out as the "intriguing" case where the wealth effect is "statistically insignificant" despite having the world's best performing index, it said.

In addition to slowing wage increases, the stock market's relatively low proportional comparison with China's gross domestic product (GDP) also undermines the positive lift from stronger equities, HSBC added. China's market capitalization represents nearly 90 percent of the country's GDP, ranking the mainland 7th place among emerging Asian peers.

Meanwhile, the run-up in mainland stocks could lead to a "crowding-out" of the wealth effect, HSBC said.

"Rising stocks increase expectations of future returns, which induce residents to substitute consumption with more investments. This behavior reduces households' immediate consumption and is prominent in China where investment channels are still limited," the report added.

Another factor mitigating the wealth effect in China is a low domestic participation rate in the equity market, even though data from the China Securities Depository and Clearing Co. revealed a 433 percent on-year jump in new trading accounts over the first three months of 2015.

"There have been millions of new accounts opened so it seems that it is not just the super-rich that are taking part, but I suppose the question to ask is whether [this] captures the amount of capital gains that people are spending," Richard Jerram, chief economist at Bank of Singapore, told CNBC.

"If there is roughly 15 trillion yuan of capital gains over the past year, and you assume 5 percent of the gains are spent – a fairly common rule of thumb – then that amounts to less than 1 trillion yuan in a 63 trillion yuan economy. Potentially significant, but maybe hard to see," he added.

Exceptions

But, private consumption in Hong Kong and South Korea could still benefit from the respective gains in their countries' equity markets, thanks to factors like a significant market capitalization, high domestic stock ownership and an even distribution of equity ownership across the population, the HSBC report noted.

For example, the market value of Hong Kong's financial market is equivalent to 1,119 percent of its GDP, the highest in emerging Asia. While South Korea's market capitalization ranks near the bottom in the region compared with its GDP, a wide access to financial products underpins the wealth effect from equity price increases, HSBC wrote.

The Hang Seng index has been an outperformer, up 18.75 percent since the start of 2015, thanks to a surge in interest from mainland investors lured by valuation discounts in H-shares. A relaxation in rules last month, which made it easier for mutual funds to use the cross-border stock link, also contributed to the surge in trading activity.

Meanwhile, South Korea stocks leaped 11.39 percent over the same period.