Asia is home to the world’s hottest stock markets in 2014 so far. Out of the 20 stock markets in Asia, only three are down on the year and they have an average return of 10.86% YTD in US dollar terms. This compares with the S&P 500 up about 8.8% on the year.
1. Emerging and Frontier Markets are leading the way
Relatively developed countries are lagging the region, while emerging markets are leading the charge higher this year. Take out Cambodia, a tiny market with only 2 stocks and myriad problems, and Asia is up an average of 12.66% in 2014!
The move is being driven by some of the biggest countries in the region, with India and Indonesia (#2 and #4 in population size globally) ranking as the two best performers in 2014. India’s performance is a result of a change in investor sentiment after the election of Modi this year, while Indonesia is bouncing back from a horrific 2013.
The region’s overall performance this year is even more surprising given the negative sentiment overall for emerging markets at the beginning of this year. Even with EM markets down over 5% the last two weeks, Asia is holding up strongly.
2. Always Account for Currencies
One reason Asia has done relatively well versus the rest of the world is the strong performance of currencies in the region. With the impending end of QE, the USD has strengthened of late. This is easily seen with USD-denominated asset prices (most notably commodities like gold and oili) retracing, and the USD appreciating against most of the world’s currencies.
On the other hand, Asia as a whole has lost just 1.58% this year against the USD, with over half of the countries around flat or even up on the year. A region full of countries with current account surpluses is a strong reason for this, although it should be noted that both India and Indonesia run the region’s highest current account deficits. However, with yields hitting record lows around the world, high yielding currencies like INR and IDR have attracted investor capital and stayed buoyant.
In fact, in an expanded ranking of currencies this year, Asian currencies dominate:
3. Last Year Was Not Great For Asia
Asia as a region was up a paltry 2.74% in 2013 in USD-adjusted terms. This performance was particularly poor when compared to the S&P 500’s return of almost 30% that year. This means that while Asia has done well this year, it is playing catch up and coming from a much lower level. While Pakistan, Vietnam, and Nepal can boast of large double digit gains two years running, the rest of Asia is hoping that the performance this year is the start of something better.