Anushka Trivedi and Tom Westbrook

SINGAPORE (Reuters – When the Federal Reserve decided to cut bond buying last time, there was a huge outflow of cash from emerging markets. Investors believe this time will be different as they place their hopes on shining returns in Asia’s largest developing economies.

Indonesia, in particular, has stood out with equity inflows, a steady currency and even its notoriously volatile bond market calm through months of taper talk leading up to Wednesday’s announcement https://www.reuters.com/business/with-bond-buying-taper-bag-fed-turns-wary-eye-inflation-2021-11-03 the Fed would begin paring purchases.

It is a far cry from the “tantrum” that walloped bonds and emerging markets’ currencies in 2013 – sending the rupiah down about 17% in five months – after then Fed Chair Ben Bernanke surprised markets https://www.reuters.com/article/us-usa-fed-2013-timeline-idUSKCN1P52A8 by mentioning tapering to Congress.

It was better than expected and people were not surprised Wednesday. The fundamentals for Asia are changing, with low inflation and high exporters benefiting from higher energy prices. Investors have become more willing to wager that the 2013 cycle will be different.

“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.

“Sitting out there in Asia, we have other things that are more high of mind for us than The Fed,” he stated. These included China’s credit markets and volatility commodity prices as well as the equities flows to support Indonesia’s currency.

Excited about upcoming listing, cash has been flowing into Indonesia’s stock exchanges. Jakarta is poised for the best year since 2017. Indexes in Thailand (Vietnam) and India are also on their way to similar milestones.

Indonesia is the biggest exporter of palm oil, and its skyrocketing co- and petroleum prices have pushed Indonesia’s trade surplus up to new records. They also promise an income tax that will soothe sovereign bond investors.

Jessica Tea, an investment specialist in Asia Pacific and greater China equities for BNP Paribas (OTC) Asset Management Hong Kong.

“We also see a growing middle class, rising household incomes, and Indonesia is definitely one of the most attractive exposures in this region.”

FORMERLY FAMILY

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

According to UBS analysts the retail account numbers in Vietnam have risen by about a third to the top of three million since 2019, bringing the benchmark index to 50%. This is twice the rate that the UBS Index.

The Indonesia Central Securities Depository data shows that there are more investors in Indonesian stocks than ever before, with 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 economist (OTC) stated that “I’m worried about growth prospects” because the country has not recovered from the pandemic.

The possibility of a calm taper remains a strong bet, particularly as Chinese markets remain cautious and weighed down.

“The Fed is able to manage taper communication successfully without major problems.” Deutsche Bank Late September, analysts from the DE:

They added that “Asia’s former fragile five member are also much less fragile”, referring to Indonesian and Indian, who, along with Brazil and South Africa, were considered particularly vulnerable to foreign currency flows.

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.

This story incorrectly refers to the business name of BNP Paribas Asset Management and not Wealth Management.