By Chao Deng
A consensus is emerging among investors that some Asian markets
can do well even with the prospect of higher U.S. interest rates on
the horizon.
Fund managers see stepped-up corporate and economic overhauls by
leadership in China and India this year, combined with relatively
strong growth in Asian economies compared with the rest of the
world, as reasons to be bullish. Investors choosing Asia have been
rewarded in the past three months. The MSCI Asia ex-Japan index is
up 2.4%, topping the 0.4% gain in emerging markets globally and
comparable to the 2.6% increase in the S&P 500.
Last week was a bumpy one for some Asian markets, starting out
with bad economic news from China early in the week and anxiety
over a Federal Reserve meeting and the Scottish independence vote
later in the week. At the same time, investors were selling shares
of Asian stocks to fund their purchases of Alibaba Group Holding
Ltd. shares in its big U.S. initial public offering, traders said.
For the week, the MSCI Asia ex-Japan was off by 1.1%, compared with
a 0.7% drop for the MSCI Emerging Markets Index and a 1.3% gain in
the S&P 500.
The Fed said Wednesday that it remains on track to end its
bond-buying stimulus program in October. It is widely expected to
raise interest rates next year. Higher interest rates in the U.S.
can hurt Asian assets by drawing investment money into U.S. assets
and away from Asia's markets.
Despite the concerns over U.S. interest rates, investors say
they are selectively investing in Asian markets that they see as
cheap and where economic fundamentals have improved or where they
believe reforms are on the way.
Investors continued putting money into Asian emerging markets
last month, according to the latest data on money flows from the
Institute of International Finance. Stocks and bonds in Asian
emerging markets received $9.7 billion in August. While that is
down from $23.3 billion in July, Charles Collyns, chief economist
at the institute, said last month's inflows were comparable to the
average $15.3 billion that the region received each month between
May and July. In contrast, emerging markets in Europe, the Middle
East and Africa saw investors pull out money in August. Data for
September are due next week.
"Flows [to Asia] look more robust because these economies are
generally doing quite well and [their] exports [are] benefiting
from the recovery of countries tightly linked to the global supply
chain," said Mr. Collyns. "We expect capital flows to Asia to
remain solid," unless the market starts expecting the Fed to raise
rates sooner than it does now, he added.
Still, within Asia, investors are getting pickier. As the time
for a likely U.S. interest- rate increase approaches, "we are
seeing money be more selective," says Petr Kocourek, senior
portfolio manager of multi-asset solutions at First State
Investments.
Ajay Argal, head of Indian equities at Barings Asset Management,
says India is in a better position to withstand higher U.S.
interest rates now that it has cut its current-account deficit to
less than 2% of gross domestic product.
"India had quite a big scare last year" with its current-account
deficit rising to more than 4.5% of GDP as the prospect of the Fed
winding down its stimulus program was announced.
"We still believe in the long-term fundamentals in India," and
increased investments in its infrastructure should help boost
economic growth, says Pruksa Iamthongthong, Asian equities
investment manager at Aberdeen Asset Management.
The firm is still overweight Indian stocks even after taking
some profits as the market has outperformed its counterparts in the
region this year. India's S&P BSE Sensex index is up 28% for
the year.
Also looking past the Fed's tighter monetary stance, asset
managers such as Edinburgh-based Standard Life Investments and New
York-based AllianceBernstein are investing more in China. The
country's capital accounts are closed, helping protect the domestic
economy from the potential impact of a U.S. rate increase.
AllianceBernstein's director of research for Asia ex-Japan
equities, Rajeev Eyunni, says while a U.S. rate rise might weigh on
Chinese sectors like property, which are sensitive to borrowing
costs, it hasn't stopped the firm from building up its exposure
there.
Chinese stocks are cheap and Chinese company profits will
benefit from lower commodity prices and increased consumer demand
due to higher wages, as well as opportunities for firms to gain
market share in still fragmented industries, said Stuart Rae, the
firm's chief investment officer.
The MSCI Asia ex-Japan index has gotten cheaper on a
price-to-book basis compared with the MSCI World Index, suggesting
there is "no argument for overheating" in Asia, Mr. Rae said.
Fund managers in China have also been able to focus on
fundamentals in the country, including improvements at its big
state-owned enterprises.
"We've generally been underweight SOEs, but now we're adding,"
says Alistair Way, investment director of emerging markets at
Standard Life. He cited China's largest oil refiner, China
Petroleum & Chemical Corp., as an example.
Chinese manufacturing data on Tuesday could further darken the
outlook for the region's biggest economy. But the country's move
last week to loan $81 billion to five major state-owned banks
suggested Beijing will add stimulus to the economy to keep growth
steady. Also, a program beginning in October that allows overseas
money managers to buy Shanghai-listed firms via Hong Kong's stock
exchange should mean a new surge of cash to support the market.
In Japan, the prospect of rising U.S. interest rates has
weakened the yen, driving the currency down to a six-year low. That
has boosted shares of Japanese exporters, helping the Nikkei Stock
Average jump 5.8% so far this month.
One factor offsetting the prospect of higher U.S. interest rates
for investors across developing markets, not just in Asia, is that
central banks elsewhere are becoming more accommodative. The
European Central Bank dramatically eased its monetary policy
earlier this month, and a struggling economy in Japan is
increasingly putting pressure on the Bank of Japan to increase its
stimulus program.
Write to Chao Deng at Chao.Deng@wsj.com