Asia's emerging markets should be called 'submerging'

For Asian emerging markets a more apt moniker right now would be "submerging". Everything, from stocks to bonds and currencies, has been hammered by indiscriminate selling from investors desperate to get out of a crowded trade while there's still a soupcon of liquidity left.

MSCI's benchmark index for stocks in the emerging world fell for a sixth straight day on Tuesday to plumb one-year lows, led by a slide in Chinese stocks to levels not seen since the depths of the global financial crisis in early 2009.

Yet some countries are less emerging than others and have strengths that should make them a good long-term bet, especially if the Federal Reserve's confidence in a US recovery proves prescient.

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"Relatively industrialised North Asia will benefit from the next phase in the global cycle - a pickup in demand for high-tech exports amid subdued commodity prices," say analysts at Barclays.

Lower resource prices should also help temper inflation giving some central banks room to provide stimulus, they added. "In contrast, Southeast Asia's commodity exporters will see deterioration in their balance of payments and investment."

Most vulnerable are those countries with intractable current account deficits, primarily Indonesia and India. Indonesia relies heavily on commodities that are falling in value as the US dollar, the currency in which most are traded, climbs, a trend that many feel has some years yet to run.

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India's policy options are constricted by stubbornly high inflation, though the latest data did hint at a welcome moderation in price pressures. Government foot dragging on reform has also soured the mood of offshore investors, one reason the rupee hit is near record lows.

In contrast, the reforms pressed by Philippines President Benigno Aquino have won plaudits from investors, while helping the country post the fastest pace of economic growth in Asia. The Southeast Asian nation is a key cog in the supply chain of electronics, which should do well if the US consumer gets shopping again.

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It runs a current account surplus and was upgraded to investment grade earlier this year, although the small size of, and limited access to, its domestic markets shuts out some foreign money.

The Philippines also has a comfortable cushion of foreign currency reserves, a feature it shares with pretty much all of Asia. Malaysia, Thailand, Indonesia, South Korea and the Philippines have combined reserves worth $833 billion, more than 10 times as large as during the Asian crisis of 1997 and 1998.

Throw in the hoards held by China and Japan, and Asia as a whole has around $6.7 trillion in reserves, equal to a sizable chunk of global gross domestic product.

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Indeed, Credit Suisse calculates that reserves in all the major Asian countries are at least twice as large as their exposure to short-term external debt, an important buffer against capital flight. Singapore is also blessed with a hefty current account surplus and huge reserves and an export mix that would benefit for a real recovery in the United States.

However, its debt markets are also highly correlated with those in the United States and have thus suffered badly from the recent Fed-fuelled plunge in Treasury prices. Also looming over the region is Beijing's apparent tolerance for slower, if more sustainable, economic growth.

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Bank of America Merrill Lynch's June survey of fund managers found that the risk of a hard landing in the Asian giant had become their biggest fear, ahead even of a euro zone break-up.

That was a chilling message given the survey drew 248 respondents with $708 billion of assets under management. And that was before the official squeeze in Chinese money markets which saw banks scrambling for cash. But even that could be an opportunity.

"The biggest contrarian play in the market today is assets linked to China," said Michael Hartnett, chief investment strategist at BofAML Global Research. "The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China."