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Worst of Crisis Over for Asian Emerging Markets, Nomura Says

Jakarta at Night
The Patung Pemuda Youth Monument stands amid congested traffic at night in central Jakarta. The Indonesian rupiah and the Jakarta Composite Index plunged by the most in five years in August after the Southeast Asian nation’s current-account deficit climbed to a record, economic growth slowed and inflation accelerated. Photographer: Ed Wray/Bloomberg

The worst is over for Asian emerging markets after investors pulled billions of dollars last month on concern the U.S. Federal Reserve will start cutting back bond purchases, according to Nomura Holdings Inc.

“We’re through the worst of the crisis but it doesn’t mean individual countries won’t continue to suffer significant challenges,” Steve Ashley, London-based head of global markets at Nomura, said in an interview. “We remain relatively positive on the longer term performance of risk assets in Asian emerging markets.”

The outlook for Asian emerging markets remains “very positive” over the next five to 10 years as the amount of investments by funds in these countries will likely have to catch up with the growing size of their economies, Ashley said in Singapore on Aug. 30.

The market value of shares traded in China accounts for 37 percent of gross domestic product, compared with 107 percent for stocks in the U.S., according to data compiled by Bloomberg. The proportion is 45 percent for Indonesia and 54 percent for India, the data shows. The International Monetary Fund in July predicted the economies of developing Asia will expand 6.9 percent this year, compared with 1.7 percent for the U.S.

Chinese Manufacturing

The MSCI Asia-Pacific Excluding Japan Index dropped as much as 14 percent after Federal Reserve Ben S. Bernanke said on May 22 the central bank may start tapering $85 billion in monthly U.S. bond purchases if the world’s biggest economy improves. The gauge climbed 0.6 percent as of 11:33 a.m. in Singapore, rising for a fourth day.

A gauge of Chinese manufacturing index rose to its highest level in 16 months in August as new orders jumped, adding to evidence that growth in the world’s second-largest economy is strengthening after a two-quarter slowdown, according to a government report over the weekend. The Philippine economy expanded by more than 7 percent for a fourth straight quarter in the three months to June, a separate report showed.

The positive outlook for Asian emerging markets provides an opportunity for Nomura outside Japan, Ashley said. The number of Nomura clients in Asia excluding Japan for the global markets division doubled in the past three years, he said.

Since taking on his role in December last year, Ashley, 46, has pushed to integrate the bank’s 1,800 sales and trading staff from equity and fixed income. There are now trading floors handling multiple asset classes in London, New York and Singapore, he said, with the one in Hong Kong to be set up by the end of the year.

Closer Collaboration

“The closer collaboration between fixed income and equities is actually indicative of closer collaboration with all of the other Nomura divisions -- retail, asset management, wealth management,” he said.

Ashley’s view contrasts with Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP, who has said more losses are likely for emerging markets because investors will withdraw funds as the Fed pares stimulus. About $44 billion has been pulled from emerging-market stock and bond funds globally since the end of May, data provider EPFR Global said on Aug. 23.

The Indonesian rupiah and the Jakarta Composite Index plunged by the most in five years in August after the Southeast Asian nation’s current-account deficit climbed to a record, economic growth slowed and inflation accelerated. The Indian rupee fell to an all-time low last month after the country’s current-account deficit widened to an unprecedented $87.8 billion in the fiscal year ended March.

Fragile Sentiment

“What we are seeing in emerging markets is a very fragile investor sentiment,” Rohit Arora, a Singapore-based fixed income strategist at Barclays Plc, said in a Bloomberg Television interview with Rishaad Salamat today. “The focus has been countries with higher current-account deficits and investors are questioning how those countries will fund their deficits in an environment of tight liquidity when the Fed starts to tighten the monetary policy.”

Indonesia’s central bank unexpectedly increased its key interest rate on Aug. 29 to stem the rupiah’s decline, while the Reserve Bank of India raised benchmark borrowing costs in July. The two countries have the region’s biggest external funding needs.

The markets have been “addicted to the methodone of quantitative easing,” Ashley said. “It needs to wean itself off, and that’s why we see some turbulence in the markets. For the longer-term health of financial markets, it’s important that normalization takes place.”

Normalization Fears

The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Investors see a 59 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg from futures show. Yields on 10-year U.S. government bonds surged for a fourth month in August, touching the highest since July 2011.

“The market shouldn’t be frightened of normalization,” Ashley said. Historically, “the first half of the tightening cycle is normally accompanied with reasonable economic growth and reasonable performance by risk assets. It’s only toward the end of the tightening cycle that you see a tail-off in risk asset performance,” he said.

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