(Bloomberg) -- Asia was the place to be for emerging-market investors in 2017, but a slew of issues and events risk standing in the way of the region repeating that world-beating performance.
From Donald Trump’s approach to trade to North Korea’s saber rattling and China’s ongoing quest to cut debt -- there’s no shortage of potential threats to what analysts and investors say should be another banner year for stocks and currencies in Asia’s developing markets.
“Looking at the emerging markets, Asia is in a relatively better position due to its firm fundamentals,” said Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo. “Risk sentiment is still quite strong but investors may need to be a bit more cautious in the latter part of the year.”
The MSCI EM Asia Index soared 40 percent in 2017, beating the 34 percent surge in the MSCI Emerging Markets Index. South Korea’s won led gains among Asian currencies and all but Indonesia’s rupiah and the Philippine peso strengthened. Ten-year bonds in Indonesia, Malaysia and Thailand also had a good year, while those in China, India and South Korea fell.
How will things pan out in 2018?
Here’s what to watch out for market by market:
Beijing greeted the new year with fresh steps in its offensive against debt, introducing new curbs on leveraged trading in the bond market and zeroing in on small banks’ reliance on short-term debt. The campaign contributed to a surge in 10-year government bond yields to a three-year high late last year. China’s central bank is also said to have tweaked its management of the yuan’s daily fixing, leaving it more open to market forces.
Trade friction with the U.S. remains on investors’ radars. The Department of Commerce has to decide whether to recommend slapping tariffs on steel and aluminum imports on national security grounds -- aimed at China in mid-January. Some mainland Chinese stocks will be included in MSCI Inc.’s indexes from May, and China could potentially be included in at least one of the world’s three major bond indexes.
Tensions with North Korea have eased amid talks between the two nations, with plans for Pyongyang to send a delegation to the Winter Olympics in South Korea next month.
Still, a potential currency fight is brewing with Seoul warning about gains in the won, Asia’s best-performing currency in 2017. That’s reignited concerns over possible currency intervention on the part of Korean policy makers to shield export growth. Likewise, ongoing negotiations with the U.S. over a free-trade agreement will also be a must watch given South Korea’s dependence on overseas shipments.
Surging oil prices pose the biggest risk to Asia’s third-biggest economy as it may add to already fast inflation and widen the government’s budget deficit, given India is a net crude importer. At the same time, the promise of faster economic growth, backed by political stability under the leadership of Prime Minister Narendra Modi, is likely to continue to burnish the appeal of Indian assets.
Southeast Asia’s biggest economy holds elections in 17 provinces, 39 cities and 115 districts in June, and the presidential vote process kicks off in August when parties submit nominations. The actual election is held in April 2019. When it comes to monetary policy, economists are fairly divided on what Bank Indonesia will do after reducing the key rate twice last year.
“Politics poses a manageable risk in our view, while significant foreign ownership in the bond market gives potential for volatility,” said Sriyan Pietersz, an investment strategist at Matthews Asia.
Read more about the risk posed by offshore investors to Indonesian debt.
Second only to Indonesia in the size of its economy, Thailand also sees political factors at play in 2018 with elections set to end the military rule that’s been in place since May 2014. Thai assets have started off the year strongly, with the baht rising to its strongest level since September 2014 and the SET stock index hitting a record. Thailand’s economic outlook also remains solid with a recovery in exports and support from further development of the Eastern Economic Corridor, a region targeted by the government for investment.
Malaysia must hold an election by August, with the ruling coalition’s 60-year rule of the Southeast Asian nation at stake. Gains in the benchmark FTSE Bursa Malaysia KLCI Index -- which posted its best monthly performance in five years in December -- continued into last week amid bets government-linked companies would benefit from the vote. Higher oil prices and stronger growth should also support Malaysian assets in 2018.
Economists predict the Philippines will continue to see the fastest growth in Southeast Asia this year, with contributions especially from the government’s infrastructure push. The passage of a tax reform program will help fund that drive, while personal income tax cuts should boost consumption.
Nevertheless, the economy runs the risk of overheating and the government’s “build build build” program could exacerbate the trade deficit and keep weakening pressure on the peso, according to Sanjay Mathur, chief economist for Asean and India at Australia & New Zealand Banking Group Ltd. in Singapore.
Taiwan’s economy faces a major transition this year with the central bank to get its first new chief in 20 years. But the government has yet to name a successor to Governor Perng Fai-nan, who retires on Feb. 25. Whoever takes over will have to strike a balance between the strong Taiwan dollar and export-driven growth, with the U.S. more sensitive to things like currency intervention. On the political front, regional elections are due in late 2018.
©2018 Bloomberg L.P.