Anushka Trivedi and Tom Westbrook

SINGAPORE (Reuters – When the Federal Reserve decided to cut bond purchases, there was a surge of capital outflowing from emerging markets. Investors are betting on bright returns that will extend in Asia’s most important developing countries.

In particular, Indonesia stands out for equity inflows. It has a stable currency, and its notoriously volatile bonds market have calmed down through months of taper talk that led up to Wednesday’s Fed decision to begin buying back.

This is far from the “tantrum”, which smashed bonds and currencies of emerging markets in 2013, sending the rupee down approximately 17% within five months. It was after Ben Bernanke, then Fed Chair, surprised markets by noting tapering to Congress.

It was much better than expected, so few people were shocked on Wednesday. However, fundamentals of Asia where there is less inflation and more exporters are able to take advantage of high oil prices are markedly different. Investors are willing to place a greater bet than ever that this will never happen again.

“We’ve seen it through 2018 and 2013, so I don’t think that’s the same in this rate hike cycle,” explained Howe Chung Wan (head of Asia fixed income, Principal Global Investors Singapore), who is selectively exposed to emerging markets.

He said that “Sitting here in Asia there are other matters that are more important to us than the Fed” such as China’s credit markets, volatile commodity prices and China’s economy.

In Indonesia, enthusiasm over upcoming listings has dragged cash into the stock market. The benchmark Jakarta bourse is on track for its best year in 2017 with similar milestones for indexes from India, Vietnam, Thailand and India.

Indonesia, which is the largest producer of palm oil and coal in the world, has seen skyrocketing prices. This trade surplus and tax promise have helped to ease sovereign bond investors.

Jessica Tea (OTC:) Wealth Management, Hong Kong investment specialist at BNP Paribas said that “Indonesia has benefited a great deal from this energy crisis.”

“We also see a growing middle class, rising household incomes and an increasing number of people residing in Indonesia – this is undoubtedly one our favourite regions.”

FORMERLY FAMILY

In a region with small investors, market mechanics can also be a tailwind.

The retail accounts numbers rose by around a third in Vietnam since 2019 to reach three million. According to UBS analysts this has helped drive the benchmark index up to half of what it was last year.

The Indonesia Central Securities Depository data shows that there are more investors in Indonesia than ever before at 6.7 million.

International investors also are circling, with Chinese regulator crackdowns causing investors to be concerned about finding ways to make their money work in emerging markets.

It is clear that destinations like Indonesia are still risky and susceptible to capital flight, even if the low-risk U.S. rates increase sharply. Particular caution should be taken regarding the outlook for growth, particularly as the government legally has to lower its deficit.

Kunal Kundu (societe Generale, OTC:) said that although the country had recovered from the pandemic, “I worry about the growth prospects.”

The possibility of a calm taper remains a strong bet, especially since the Chinese market is weighed down in cautious sentiment.

“The Fed managed to navigate taper communication with no major disruption.” Deutsche Bank Late September, analysts from the DE:

“Asia’s ex-fragile five members are now far more fragile,” they said. They were referring to India and Indonesia, both of which, along with South Africa and Turkey, were seen as particularly susceptible to volatile foreign money flows in 2013.

Our preferred Asian FX trade to year-end, according to our preference is for INR and IDR to remain long. We will not be taking shorts in CNH.