Gravity check for Asian stocks in 2018

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A woman walks past an electronic board showing the movements of Japan's Nikkei average outside a brokerage in Tokyo, Japan, on October 23, 2017.  Photo: Reuters / Issei Kato

Bitcoin got all the headlines, but Asia’s stock markets also did plenty in 2017 to defy gravity.

Unlike the cryptocurrency boom, Asia’s equity rally is underpinned by a reasonably persuasive argument. Asia, after all, generally has what the West lacks: buoyant growth, swelling middle-class consumer sectors, vast state assets that can be privatized and, in many places, bulging young populations.

That doesn’t mean, though, that rationality reigned in 2017. How, for example, does the Hang Seng’s 34% surge in just 12 months genuinely reflect Hong Kong’s prospects amid swelling inequality? Or South Korea’s 22% rally amid tepid wage growth, record household debt levels and the nuclear threat from the North?

Mumbai’s 27% boom belies India’s slowing growth and general dysfunction. Rodrigo Duterte’s bull market in body bags raises questions about the 24% rally in Philippine stocks. And virtually everyone agrees Vietnam has great potential – but a 42% gain in 12 months great?

The real cracks in Asia’s stock narrative come from Washington, though. One is a Donald Trump White House that’s doing less to accelerate growth than punters bet in 2017. The other is a World Bank warning that Asia’s inequality challenge is worsening, even as growth and stocks boom.

The first concern relates to the US president’s dragging of “trickle-down economics” out of the dustbin of discredited ideologies. There’s nothing about Trump’s giant tax cut that gives companies incentive to increase wages or invest in new US jobs. Trump’s internet “neutrality” gambit will also dent competitiveness. Bottom line: America’s inequality woes are about to get worse.

The focus has swung to maximizing growth. That means, unfortunately, that efforts to reduce bureaucracy, attack corruption, level playing fields, manage urbanization flows, train workforces and, in general, to prioritize the quality of growth over the quantity of it, have taken a backseat

The second is about how reform fatigue since the 2007- 2008 global crisis is coming back to haunt Asia. “The whole basis for East Asia’s success was this sense that everything was fair – you worked hard, you got ahead,” says Sudhir Shetty, chief World Bank economist for East Asia and the Pacific. “But that is beginning to unravel a little bit.”

He adds that “for the region to sustain inclusive growth, countries will need to address the challenges of fully eliminating extreme poverty,  enhancing the prospects for economic mobility and assuring economic security for all.”

Credit where it’s due: Asia has come a long, long way since its own reckoning in 1997-8.

Governments are more transparent, banks healthier, institutions stronger and cronyism less of an immediate threat. The World Bank estimates by 2015 roughly two-thirds of developing Asia’s people were “secure” or approaching the vicinity of middle-class, a huge
improvement from the 20% level in 2002. Extreme poverty was also down sharply to a bit less than one-eighth, from almost half in 2002.

Progress has, however, stalled somewhat in recent years. Today, the percentage of developing Asians on the precipice of poverty — living on incomes of between US$3.10 and US$5.50 per day – is now the same as in 2002 at around 25%.

Blame complacency. The return of rapid growth between 2008 and 2013 had too many governments shelving upgrades to boost competitiveness, wages and productivity. Then came the Federal Reserve’s “taper tantrum” in 2013, and the resulting reckoning in emerging markets from India to Brazil.

Since then, the focus has swung to maximizing growth. That means, unfortunately, that efforts to reduce bureaucracy, attack corruption, level playing fields, manage urbanization flows, train workforces and, in general, to prioritize the quality of growth over the quantity of it have taken a backseat.

Even in the most advanced economies – including Japan and Hong Kong – structural reforms aren’t keeping pace with equity gains. That doesn’t mean Asian equities aren’t a buy (although not at today’s irrational prices), or that Asia isn’t every bit as promising as investors think.

Just don’t forget gravity.

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