Equity markets are seeing a strong start to the year globally. In parts of Asia, maybe too strong.
Six months ago, it was common to hear that while U.S. markets might recover a large portion of early-2020 losses quickly, emerging markets would be slower to bounce back. But the MSCI EM Index is practically level with the MSCI USA for the past 12 months, and many Asian equity indexes are way above U.S. peers.
The Taiwanese and South Korean bourses are the most obvious examples. The Taiex and Kospi are up 45% and 36%, respectively, since the beginning of 2020, while the S&P 500 is up more like 18%. China’s equity market recorded a strong 2020, but the most interesting performances may be outside the world’s second-largest economy.
Perhaps most perplexing is India’s equity stock market. The Sensex index now matches the S&P 500’s gain in dollar terms for the same period. India, of course, has nothing like the capacity of the U.S. to support the economy with either monetary or fiscal policy. Its price to earnings ratio for the 12 months ahead has risen even more than its U.S. equivalent since the nadir in March.
The countries performing well each have some things going for them: India will be one of the first developing countries in the world to begin a vaccine campaign, South Korea’s low number of Covid-19 cases has been a model for countries with active outbreaks, and Taiwan has managed to keep itself almost hermetically sealed away from the pandemic.
But the very high levels of froth in quite different Asian markets—all with distinct apparent justifications—is in itself a concerning sign. The pandemic won’t last forever: Unless all those different bullish stories turn out to be structural tailwinds somehow, it is unclear why Asian EM stocks generally should suddenly be doing so very much better than the U.S. or Japan. The U.S. equity market rally, as extreme as it has been, has been driven by expectations for the years ahead, while investors look past the ugly reality of earnings through the pandemic.
The weakness of the dollar has made life easier for parts of the world with large revenue denominated in other currencies, or dollar-denominated debts. But the recent upswing can’t be accounted for by currency effects alone.
There are elements to worry about: Retail buying of stocks has ballooned in South Korea. In the past week, individual investors have regularly transacted the equivalent of more than $30 billion a day in the equity market. In 2019, they didn’t crack $10 billion on any day. India has seen what could well end up as unsustainable flows from foreign investors, who bought $37 billion of the country’s stocks in 2020—the only large market in Asia that saw net buying from abroad.
There is no sense in betting against such rallies, especially where frenetic retail activity is in play. But investors should be cautious about surges without foundations. If the market narrative changes, several Asian markets look like they would be left most exposed.
Write to Mike Bird at Mike.Bird@wsj.com