beyondbrics

By Josh Noble and Robin Kwong

For Asian market watchers, there’s been a pretty clear divergence across emerging markets in the past few months. Known either as the ‘north-over-south’ trade, or the exporter trade, investors shifted their money out of domestically driven southeast Asia, and into the export markets of South Korea and Taiwan.

But, if the past few days are anything to go by, the trade may already be reversing.

Since late November, southeast Asian markets have been in volatile mood. The big bull markets of 2010 – Indonesia, Philippines and Thailand – all seemed to have lost their vim. Some trading sessions in the new year have seen heavy selling. Investment downgrades have followed suit.

As investment banks unveiled their 2011 forecasts, there was a near universal consensus – sell SE Asia, buy Korea and Taiwan. Both of those markets went on a run, with investors betting that a US recovery would boost export-driven economies. Citi’s Markus Rosgen says that the north over south divergence will continue until the middle of 2011.

But February has so far told a different story. In Taiwan, for example, foreign investors have sold a net T$83.3bn so far this month, compared to buying net T$99.3bn in January. This ended a five-month run of net inflows from foreign investors into the Taiwan stock market.

On Wednesday alone they sold net T$1.57bn and the Taiex fell almost 2 per cent.

UBS says it’s time to get out of the trade, this from Niall MacLeod and his team.

The combination of what we expect to be peaking leading indicators in the coming months allied with reasonably firm relative valuations leaves little left in the tank in our view for what was essentially a ‘macro’ trade that started last November: the ‘exporter trade’ looks to be largely behind us.

In the process, UBS have downgraded their views of Korea and Taiwan to underweight.

Cyclicals in general and Taiwan and Korea have tended to struggle in relative terms after leading indicators peaked – whilst the absolute valuations are not yet ‘expensive’, relative to the rest of Asia the PB is back to near peak levels since 2003. As such we cut the markets to underweight.

While investors who are long these markets might not have much cause for cheer, it may come as welcome news to both central banks and corporates in both countries.

Taiwan’s central bank spent the better part of last year fending off hot money inflows that pushed the Taiwan dollar higher against the US dollar, breaching its key T$30 level and reaching a high of 28.8 – a level not seen since the before the Asian financial crisis. But since the start of the month, the Taiwan dollar has weakened, closing on Wednesday at 29.57 to the US dollar.

Export-oriented companies who have been impacted by the rising Taiwan dollar are also breathing a sigh of relief. Morris Chang, chief executive of Taiwan Semiconductor Manufacturing Company, the world’s biggest contract chipmaker, told reporters on Wednesday that the outflow of foreign hot money means that the Taiwan dollar’s exchange rate should become more stable over the next few months to half a year.

While events in the middle east and north Africa have surely hit investor sentiment towards all emerging markets, it’s worth noting that the two star performers since November have both fallen further than India since the start of the month. Indonesia, meanwhile, is back in positive territory.

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