Far East - quarter 2 commentary from AEGON Asset Management
In the second quarter 2008, the MSCI Asia ex Japan fell 5.3% in US dollar terms and 5.5% in sterling terms as high oil prices impacted the energy intensive economies of Asia. In the course of the quarter, the oil price rose from US$100.98/barrel to US$140/barrel. With the exception of Australia, Indonesia and Malaysia, the rest of the region are oil importers. Therefore, the dramatic hike in oil price fed directly through to narrowing current accounts and higher inflation. Indirectly, most countries in the region have in the past attempted to subsidise fuel and electricity prices. The oil price rise has made this policy fiscally unsustainable. As a result, we have seen China, Taiwan, Malaysia, India and Sri Lanka all cutting subsidies, leading to still higher consumer price inflation. Governments have responded by raising bank reserve requirements and raising interest rates, thereby slowing growth at a time when companies are seeing their margins eroded by higher raw material and energy costs.
The Philippines was the hardest hit market, followed by India. Taiwan suffered as the euphoria over the promise of closer ‘Cross Straits’ relations with China became overshadowed by the macro economic picture. China itself was more resilient, given the Government’s strong fiscal position and a weaker May CPI number (7.7%), down on the previous month. Korea also held up (MSCI Korea) as a weaker current account drove down the Won, enhancing exporters’ competitiveness. Unsurprisingly, the city-states of Hong Kong and Singapore (MSCI HK, MSCI Singapore) were also resilient, given their size and service sector orientation. Australia was the best performer in the region, falling just -1.6%, in light of its strong resource sector.