With Turkey and Argentina among high-profile emerging markets to crash this year, it is understandable that it has left some investors nervous about where the next surprise could come from.
But Joanna Kwok, manager of the five FE Crown-rated JPM Asia Growth fund, said they should not expect it to come from the Asia region.
In Turkey, the underlying problem is the country’s high degree of reliance on external financing, which was compounded by US sanctions on its exports causing the Turkish lira to plummet.
In Argentina, the peso tanked even further than the lira as the central bank was forced to hike interest rates to a record level of 60 per cent this year after rampant inflation and a large and growing current account deficit caused investors to pull their money from the country.
Performance of indices over YTD
Source: FE Analytics
As the above chart shows, both stock markets have fallen significantly compared with the wider MSCI Emerging Markets index, as MSCI Turkey dropped by 41.97 per cent and MSCI Argentina was down by 48.32 per cent.
“These other emerging markets really do have a lot of problems of their own mainly because of the external US dollar debt that they hold,” Kwok said.
“But if I look at Asia, the macro situation definitely has improved over the past decade and even from the ‘taper tantrum’ in the 2013-2014 period.”
The only two countries that still have current account deficits now are India and Indonesia and their currencies would therefore be the most vulnerable to any strengthening of the US dollar. However, even for those countries the macroeconomic situation has improved.
The JP Morgan manager said: “In Indonesia we have seen the central bank looking for stability over growth this time around which is good. They have been quite proactive in hiking interest rates.
“In India, the government has implemented a lot of long-term initiatives which are long-term positive whether they were short-term negative. The currency demonetisation, the GST [goods & services tax] reforms – all of those are very good for the long-term.”
While in previous years investors would have identified these two countries as looking the most likely to be next in line for a fall given their current account deficits, this is not the case today.
Indeed, although both indices have fallen so far this year on the back of a strengthening dollar, the extent is by no means the same as that of Turkey or Argentina.
Performance of indices over YTD
Source: FE Analytics
Conversely, the rest of Asia looks quite robust, with countries such as Thailand, Korea, Taiwan and China all owning strong current account surpluses.
Some investors have pointed to China as another that could have a hard landing, with fears that growth could stall leading to a dramatic turnaround in the country on the back of a ‘trade war’ with the US.
This is not Kwok’s base-case, however, as she does not believe China is “going into a hard landing any time soon”, but she noted that even in such a scenario the government has levers that it can pull.
“They have learned from the past that they don’t want to come out with a massive stimulus – they want to structurally improve the economy,” said the manager of the JPM Asia Growth fund.
The government have come out with a number of reforms in the aluminium, steel and cement sectors among others, which have been very good in terms of bringing profitability back to the better companies within the sectors.
But there is more that can be done that they had (as yet) not needed. “You can still lower your reserve requirement, you can still pump the liquidity back in so they have still got a lot of levers to pull if things get really bad from here,” she said.
In fact, she noted that China has been deleveraging over the past few years on the back of a supportive global growth environment.
However, this has been reined in somewhat more recently thanks to the macroeconomic uncertainty and aforementioned geopolitical issues.
And if China is not going to see a hard lading then it seems like the rest of Asia looks to be on okay footing.
Kwok added however that the Philippines, while only a small economy, might be one to keep an eye on as an economy that could be overheating, although it is unlikely to blow up in the same way as Turkey or Argentina.
“The GDP growth has been around 5 or 6 per cent but inflation is picking up a little bit, the economy has been growing well and in a way the central bank there might have been a little bit behind the curve in terms of hiking interest rates,” she said.
This is in contrast to countries such as Indonesia and Thailand where their banking system is still coming out of their bad debt cycle and recovering.
As such, she noted: “Asia is looking a lot better than the rest of the emerging markets and I can’t think of one that is about to go.
“It is definitely the sentiment that is dragging the market down because the underlying fundamentals for Asia is definitely better than the rest of the emerging markets.”
Kwok has co-managed the £242m JPM Asia Growth fund alongside Mark Davids since 2015, with the pair taking over from Marc Franklin.
Since the pair took charge, the portfolio has returned 60.44 per cent, beating both the benchmark MSCI AC Asia ex Japan index and the average IA Asia Pacific Excluding Japan sector peer.
Performance of indices over YTD
Source: FE Analytics
They are most overweight to India and Indonesia, while underweight Korea. At a sector level the portfolio is overweight technology and financials but underweight utilities and materials.
The fund has a clean ongoing charges figure (OCF) of 0.9 per cent.