Asia 2014: The Unloved Sprang To Life, Oil Is The Known Unknown
What a year for Asia, full of policy surprises and twist and turns. And the markets written off back in 2013 sprang to life.
Who would have thought the sleepy Shanghai stock market would wake up from its long-term hibernation? The Deutsche X-Trckers Harvest CSI 300 China (ASHR), which tracks mainland Chinese stocks, is the best performer in Asia this year, up 47%. Over half of the gain came after the People’s Bank of China surprised by cutting interest rates on November 21.
Much of the China rally is a bet on further monetary easing – just take a look at the uneven gains. Securities firms, insurance companies and banks led the rally, because they are beta plays to China’s quantitative easing. While I remain positive on the onshore market, a word of caution: Over 70% of the investors there are retail and driven by sentiments. See my December 7 blog “Why China’s A-Share Rally May End In Tears“.
India and Indonesia, two of the Fragile Five in 2013, also did well, in equities and currencies. The rupee and rupiah stayed firm, depreciating by less than 3% against the dollar, whereas their richer neighbors in the north – the surplus countries from Korea to Taiwan to Singapore – saw their currencies fall by more. This year, it is more about growth than current accounts.
It also helped that India and Indonesia, the two largest democracies in emerging Asia, ushered in reform-minded leaders Narendra Modi and Joko Widodo. By now, the MSCI India trades at around 16 times forward earnings, slightly above its long-term average of 14.1 times. MSCI Indonesia trades at 14.5 times, a good one standard deviation above its long-term average. See how much love there is? The WisdomTree India Earnings Fund (EPI) gained 27.5% and the iShares MSCI Indonesia ETF (EIDO) rose 21.2%.
In my 2015 preview column for the Barron’s weekend magazine “Rate Cuts, Reform on Tap in Asia for 2015″, I wrote that we could be expecting interest rates cuts from China and India as early as the first quarter of 2015, because emerging Asia is running dis-inflationary risk. Interest rate cuts usually mean bull rallies. But, that prediction is based on the key assumption that oil prices will stay low. The Brent crude recently traded at $57.01.
What will the equilibrium price be for oil? That is the known unknown that all of us are scratching our heads over. In its 2015 outlook, Goldman Sachs fretted that any talk of the oil price drop being temporary could only exacerbate the drop – makes sense to me and let’s hear the investment bank out:
Sharp declines in oil production costs, on top of a strong consensus view that the recent extreme oil price weakness will prove temporary (which is motivating oil producers to position for a rebound in price rather than to cut production), suggests that oil prices could fall lower and for longer. Given the expected future supply glut in oil, we believe that the market is actively looking for the new equilibrium price that will take out the excess marginal production. As the industry takes the “fat” out of the system that was built up over the past decade, the new equilibrium price is dropping sharply; where it settles is unknown right now, but we can comfortably say it is likely below our earlier estimates (Brent in the $80-85/bbl range).As many shale gas producers budget their capital expenditure in the first quarter next year, we will likely to hear a lot more about oil....MORE
