Year of the Monkey forecasts: oil, Asian stocks and EM debt
In the first part of our assessment of how our Year of the Monkey forecasts had turned out, we looked at the future for US interest rates, Japanese inflation and the renminbi. Today we look at Asian stock price movements, problems facing emerging-market debt, and the oil price.
Will Asian equity markets outperform in 2016?
Answer: No
It might seem hard to remember amid the rising market valuations of early 2017, but a year ago Asian equity markets had a torrid start to the year.
As we noted last year, Asian stocks had seldom been cheaper, trading at an 11-year low versus the MSCI World index in terms of forward price to earnings. And there were few signs of an imminent rebound, given slowing growth outlooks and earnings momentum.
In contrast, European equities looked a better bet on a risk-reward basis because of earnings growth and an expansionary monetary policy, over and above the possibilities in the US, where a strong dollar and higher labour costs risked constraining stock performance.
The experts we spoke to prevailed once again in their view that developed market equities would outperform Asian stocks. The MSCI All Country Asia Pacific Index rose 3% last year, while the MSCI World Index returned 8.15%.
Returns were very mixed across Asian markets. Hong Kong’s benchmark Hang Seng index was down 0.6% and the Shanghai Composite index fell 12.5%. Korea’s Kospi rose 3.8%, Japan’s Nikkei 225 gained rose 8% (but the Nikkei 300 dropped 2.3%), while Australia’s All Ordinaries index climbed 7%.
The region's star performer? Pakistan’s KSE100 index, which soared by 43.9% in 2016.
While Asian equities underperformed global DM equities in 2016, this year looks a little more promising.
Several experts predict the region’s depressed stock markets to regain some vigour this year, with Frederic Neumann, co-head of Asian economics research at HSBC, for instance, favouring India, Indonesia and Thailand. These markets enjoy decent growth fundamentals and strong local consumption and debt refinancing capabilities – key factors at a time of rising dollar strength.
Will there be a crisis in emerging-market debt in 2016?
Answer: No
On the debt side of the spectrum, we argued that 2016 would not be the year in which China’s debt burden became too heavy, causing it to pull down the rest of the region into a new debt crisis.
The argument for such optimism was sound and it ultimately prevailed. Unlike many other nations, China boasts enormous control over its finances and capital flows, along with very large foreign exchange reserves. This means it can better manage slowing growth.
Elsewhere, credit levels in emerging markets in Asia have been rising, but remain well below levels that led to the 1997 financial crisis. Moreover, governments are borrowing more domestically, leaving themselves less exposed to currency risk (a good thing too, given the dollar’s rise). China and Hong Kong apart, many countries in the region have floating currency regimes too, giving them flexibility in the event of sharp currency shifts.
However, Asian nations are set for more uncertainties this year. The isolationist policies of US president Donald Trump could potentially hurt exports from the region, and that could in turn impact economic growth, current accounts and debt levels too. Rises in US rates may be mirrored by the likes of Hong Kong and Korea too, also serving to slow these countries' growth.
But few experts are predicting tragedy for the year, and there is a rising likelihood that western investors will seek out the higher yields on offer in Asian economies, as rates rise. As 2016 goes, so will 2017. Don’t expect an emerging-market credit crisis this year.
Will oil prices continue to fall?
Answer: No
By late 2015 the outlook for oil was pretty bleak, to the point that Goldman Sachs had predicted in September of that year that prices could fall to $20 a barrel, at a time when it still stood at $50.
The price of WTI crude stood at $35.97 per barrel at the start of 2016, and by February had sunk to just under $30 before rebounding to end the year at $52.82.
Several factors underpinned the initial weakness. The US shale gas industry continued increasing its output, while Iran began selling again internationally after agreeing to uranium enrichment restrictions. Saudi Arabia and the Opec oil-producing consortium wanted to pressurise the US shale gas sector and to avoid losing market share to Iran, so they too kept pumping at full flow. The consequence was a glut of supply.
Yet, as we said last year, analysts at the time felt this overcapacity would eventually be resolved as oil-producing countries realised they needed to agree to reduce oil supply, which would cause prices to rise instead of falling further, until they eventually settled in an equilibrium price range of $40 to $50 a barrel. This is what happened.
Saudi Arabia and Russia in particular felt the pinch of lower crude prices, and realised they needed to respond. The former’s oil production-dependent economy made budget cuts and its economy was predicted to grow just 0.4% this year by the International Monetary Fund. The latter continues to sit in recession, a consequence of both lower energy prices and sanctions.
From a floor in February, the price of oil began reviving in the following months, to hit $49 by May. But it then dipped only once more, only to regain strength over signs of production cuts. In November Opec countries agreed to reduce oil production by 1.2 million barrels a day, and in early December some non-Opec countries including Russia agreed to cut their production by 558,000 barrels a day from January 2017. These efforts led the price of oil to rise to its currently level of around $53 per barrel.
Yet while production cuts have helped reverse the decline in oil prices, analysts’ predictions look prescient. Oil-producing countries are unlikely to agree to more cuts, while the US’s nimble shale gas producers will start fracking more whenever prices rise much over $60. The International Energy Agency said on Friday that this meant it was unlikely that crude would reach $65 a barrel. And Opec itself has said oil prices are unlikely to return to $100 a barrel level for at least 25 years.