Are Southeast Asia and India already in a bear market?

A saying goes that if Wall Street (or America) sneezes, the rest of the world catches a cold.

Well, Wall Street hasn't really sneezed this year. That is until last week.

Traditionally, Asian markets track the performance of the US markets. However, most of the Asian markets went on a different trajectory for most of this year. With a couple of exception including India and Japan, the Asian markets peaked in the early part of this year and then gradually petered out. In the meantime, the Dow, S&P 500 and Nasdaq continued to hit all-time highs with the Dow reaching its year closing high of 26,828.39 on October 3 and the Nasdaq 8,109.69 on August 29.

 

Up until last week, in spite of ominous economic signs of rising interest rates and the US-China trade dispute, investors in the US market were still upbeat, saying that the market was trading higher than at the start of the year. That changed when the Dow fell 1.2 per cent on Friday to close the week 3.1 per cent down and 0.5 per cent lower, compared with January 2 and 8.7 per cent from the year's high. The broader-based S&P500 fell 1.7 per cent losing 3.5 per cent for the week and also gave up all of this year's gains.

Although the tech-heavy Nasdaq Composite Index shed 2.1 per cent on the last trading day of the week, it is still in positive territory by 2.2 per cent for the year. However, this position may not last.

The start of the third quarter earning reporting season brought about some disappointing news. On Friday, although Amazon and Alphabet, the parent company of Google, reported higher profits, their share prices fell 7.8 per cent and 2.2 per cent respectively. Amazon's sales forecast for the critical holiday-shopping season was not up to market expectations and neither was Alphabet's revenue for Q3. Shares of other big technology companies reacted in sync - Netflix declined 4.2 per cent, Facebook lost 3.7 per cent and Apple was down 1.6 per cent.

With the Federal Reserve indicating that it will continue to raise interest rates, expectations of lacklustre corporate results and the uncertainty caused by the US trade war with China, there does not appear to be a bright-spot anywhere near the horizon to trigger a major market rebound. Some commentators are even saying that the Fed may cause the next recession by being too aggressive with their monetary policy.

Have the stock markets of Southeast Asia and India bottomed out?

The short answer is "probably no".

The largest financial market in Southeast Asia, Singapore, has fallen over 15 per cent since the start of the year and more than 21 per cent from the year's closing high achieved on May 2. Without a significant domestic market and being a major trading hub, Singapore is especially sensitive to the likely reduction in global trade arising from the increasing protectionism as well as what is going on between the United States and China, which are her major trading partners.

Year-to-date, Singapore is the second worst performing market in Asia.

The worse performing market in Southeast Asia, however, is the Philippines with stock market falling 23.5 per cent from the beginning of the year and 28.2 per cent from the year's high. This is mainly triggered by interest rate hikes by the central bank to battle inflation. In spite of four rate hikes this year to 4.5 per cent, real interest rate is still negative with inflation hovering above 5 per cent. The Philippines is also suffering from the "emerging market contagion" with net foreign money outflows caused by investors worried about the economy as well as Chinese investors impacted by the trade stand-off with the US pulling funds out. Consumer confidence is negative and business confidence is at its lowest level in almost nine years.

The India stock market has held up relatively well even as its currency has fallen about 15 per cent in 2018 against the dollar. The Sensex is just 1.2 per cent lower compared with what it was at the start of the year and some 16 per cent off the year's peak in August.

The Indian market has benefitted from a deep domestic market, government spending on infrastructure, increasing domestic investor participation in the mutual funds market as well as healthy flows of foreign capital into the country. However, there are signs that foreign direct investments are drying up. The Financial Times in June reported the central bank governor Urjit Patel saying tight dollar-funding conditions have fuelled a sharp reversal of foreign capital flows.

The Institute for International Finance (IIF), a respective authority on emerging market capital flows, published a report in August saying that the second quarter net inflow of capital to the developing markets slowed to USD 11 billion compared with USD 118 billion received from January to March. Although July saw a spike of inflows USD 7.9 billion, China received USD 5.3 billion or 67 per cent of this. It further added that the slowdown in inflow was most pronounced in India, Poland, Brazil, Argentina and Turkey.

As of now, the US market is sneezing. When it was healthy for most of the first nine months of the year or so, most Asian markets were already in decline. The second largest economy, China has seen its stock market crash almost 30 percent since the start of 2018. The two largest economies in the world are currently engaged in a trade face-off.

With uncertainty surrounding US-China trade relations, considering that historically, global markets tend to trade in line with the US markets, and taking into account the lack of positive market news, it does appear that at the moment we are in a tunnel without much illumination at the other end.