Investors feel India is safe

Singapore: Faced once again with the prospect of rate rises in the United States, investors in Asia are no longer selling and running as in the past, choosing instead to stay in markets like India and South Korea, that are relatively sheltered from global forces. The two bouts of market turmoil in May 2013 and January this year demonstrated the perils of selling out of markets prematurely and indiscriminately. This time, investors have already begun preparations for a rise in US rates by mid-2015 at the earliest, albeit with a degree of caution about the different moving parts to the policy story.

For one, central banks in Europe and Japan could soon be injecting stimulus, which would compensate the world for the cash the Federal Reserve is withdrawing. And secondly, it is entirely plausible that US growth disappoints, thereby keeping yields down but pushing stock markets sharply lower.

Standard responses to a spike in US rates, such as avoiding Indonesia, India and other countries which rely on external funding, may no longer be appropriate, given how rapidly Asia has changed in the past year.

The region’s current account deficits are smaller, bond yields are high and currencies already quite weak. Governments perceived to be more reform-oriented have taken over in India and Indonesia, and Asia’s rallying stock markets are backed by robust growth in company earnings.

“You should be in countries where idiosyncratic forces are more dominant drivers than the global forces,” said Jahangir Aziz, head of Asian research at JPMorgan. “They allow you to hedge against global changes.”

As of now, both Asian equity and bond markets are still riding a six-year long rally spurred by the heavy quantitative easing policies of the Fed and other developed economies.

But investors are prone to worry, says Mr Aziz, and this abnormally long period of very low volatility and memories of the vicious selloff in 2013 have made them uneasy.“There could be significant pre-emptive reaction in the market to the likelihood of better US growth, jobs or inflation numbers. That is where the concern is,” he said. The basis for investment is belief that, the Fed will raise rates only when it is confident that the economy is on track for higher growth and more jobs.