An arrangement of Thai baht notes featuring the late Thai King Bhumibol Adulyadej stands on display at a stall in Bangkok, Thailand. (Photographer: Brent Lewin/Bloomberg)

Asia Tops Emerging-Market Scorecard After Rout as S. Africa Lags

(Bloomberg) -- As emerging-market currencies suffered their biggest back-to-back monthly slump since 2016, Asia is outshining the rest by some measures.

Malaysia, the Philippines, Indonesia and China top the scorecard among 21 developing economies in a Bloomberg analysis based on a range of metrics including forecasts for gross domestic product and current account, sovereign ratings as well as stock and bond valuations. South Africa is at the bottom of the pack mainly due to its current account deficit and low foreign reserves.

Malaysia scored at the top amid prospects for higher economic expansion than peers, a healthy current-account surplus and a drop in its real effective exchange rate. For the Philippines and Indonesia, forecasts for robust GDP growth and a drop in their exchange rate valuation offset perceived risks stemming from the nations’ external deficits. They also drew support from the monetary authorities after the Philippine central bank lifted its policy rate in May for the first time since 2014, while its Indonesian counterpart had hiked twice, including at an out-of-cycle meeting on Wednesday to stabilize the currency.

“Asia will probably remain resilient against the rest of emerging markets from here as their economies and external balances are both relatively solid,” said Koji Fukaya, chief executive officer of FPG Securities Co. in Tokyo. “In a risk-on market, people don’t pay too much attention to the fundamentals, but when that starts to fade, people become more selective and Asia is providing relief for some.”

Higher Treasury yields and a stronger dollar have fanned concern that economies relying on foreign funds will see capital outflows. The dollar advanced against most major currencies Friday after a strong labor market report reaffirmed the U.S. Federal Reserve’s tightening path. The MSCI’s emerging-market currency index dropped a combined 3 percent in April and May, the biggest two-month decline since November 2016. Local-currency government bonds in developing economies lost 3.6 percent in the past two months, based on a Bloomberg Barclays index.

To be sure, Malaysia’s standout performance doesn’t take into consideration the impact from policy changes that newly-elected Prime Minister Mahathir Mohamad is implementing, which includes scrapping a goods-and-services tax.

Pakistan and Egypt have seen the biggest gains in their scores compared with the levels at the end of 2016. While Egypt benefited from a credit rating upgrade and higher reserves, Pakistan’s assets are looking cheap after a selloff. The valuations for Indonesian and Turkey markets have also improved following the recent slump.

LatestEnd-2016
TotalGDPSafetyValuationsTotalGDPSafetyValuations
Malaysia2.250.880.910.453.540.480.622.45
Philippines2.071.68-0.110.501.191.640.33-0.78
Indonesia1.390.85-0.771.30-0.231.07-1.12-0.17
China1.321.571.74-1.992.521.652.12-1.25
Turkey0.990.08-3.374.28-0.43-0.27-2.892.73
Poland0.93-0.020.600.351.84-0.210.331.71
Russia0.88-1.461.021.33-0.11-1.300.590.60
Korea0.53-0.752.44-1.171.48-0.522.55-0.55
Peru0.45-0.320.340.43-0.290.40-0.24-0.46
India0.341.81-0.71-0.770.032.06-0.49-1.54
Thailand0.470.003.18-2.710.62-0.142.69-1.94
Mexico0.18-1.14-0.752.071.36-0.94-0.873.17
Chile-0.31-0.520.26-0.06-0.11-0.770.270.39
Brazil-0.26-0.91-1.462.10-1.64-1.29-1.210.86
Colombia-0.39-0.89-0.711.21-0.04-0.52-0.771.25
Egypt-0.810.45-2.771.52-3.520.10-4.280.66
Hungary-1.04-0.28-0.45-0.32-0.19-0.50-0.110.42
Romania-2.430.13-1.31-1.240.40-0.05-1.081.53
Croatia-2.65-0.79-0.73-1.13-0.47-0.57-1.161.26
Pakistan-2.750.96-4.000.28-5.500.95-3.20-3.25
South Africa-3.88-1.33-2.35-0.19-3.24-1.25-2.100.11

Here’s how the scorecard is compiled:

  • Selected economies are either in the MSCI Emerging Markets Index or a Bloomberg Barclays measure tracking EM local-currency government bonds
  • Safety is derived from current-account balances, sovereign credit ratings and international reserves
  • Valuations are computed based on real yields, price-to-earnings ratios for MSCI’s equity gauges and real effective exchange rates
  • The numbers are Z-scores that measure deviations from the average of the economies covered in the case of GDP, current-account balances, ratings and real yields. The Z-scores for real effective exchange rates and P/E are based on historical comparisons
  • For reserves, the economies that sufficiently meet the International Monetary Fund’s adequacy ratio get a zero score and those that fall short receive minus 1
  • GDP growth and current account balances are from economist forecasts for 2018 and 2019 compiled by Bloomberg. Sovereign ratings are from S&P Global. Real effective exchange rates are based on JPMorgan Chase & Co. data

©2018 Bloomberg L.P.

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