There is a lot of talk in the Asia-Pacific region about asset price bubbles at the moment. Just how credible are these fears and what should investors be thinking? This article takes a look.

One of the hottest topics you will hear people chat about over coffee in Singapore is a recent Forbes article on how the city-state potentially faces an Icelandic-style economic crash.

Jesse Colombo, a columnist who claims to have predicted the US housing and credit bubble in 2005, has been pointing to bubbles occurring across Asia from current stock market darling, the Philippines, to Malaysia and more recently, Singapore.

The depreciation in the currencies of Malaysia, Indonesia and India has also contributed to talk that the bubbles may burst soon. Fitch, the ratings agency, has also cut Malaysia’s credit outlook from stable to negative while fellow agency Standard and Poor’s has warned about the country’s dangerous debt levels for both public sector and individual borrowing.

Is it just froth?
Colombo has his fair share of supporters, judging from the comments on his article. More interestingly, the central banks of Malaysia, Singapore and the Philippines have responded with official statements rebutting his claims.

One of the triggers prompting bubble talk is the meteoric rate of growth experienced by many Asian markets in the last decade. India and China awoke from decades of slumber; Indonesia and the Philippines boasted the fastest growing stock markets after years in the doldrums. (More recently, however, China’s stock market has hit headwinds, particularly since the US Federal Reserve signaled it intended to taper its quantitative easing programme. One key risk for investors is the possibility of a bank collapse in China.)

“There has been a high level of economic growth in Asia compared to developed markets in the past few years. Now with the Fed tapering potentially starting, credit growth in Asia is starting to slow and people are questioning whether Asia will see slower economic growth,” Patrick Ho, research and analysis team leader, wealth management CIO, at UBS, told WealthBriefingAsia in a recent interview.

“There is a certain truth around concerns whether Asian credit growth has been too fast and whether Asian credit as a percentage of GDP has been too high,” said Ho.

According to Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, the private bank, said: “At this stage, we are not worried. A lot of assets have been re-priced. There is a lot of liquidity around and credit quality of the region has improved but it took international investors to be given free money before they recognised that.”

“Is there a risk of bubble forming? Yes there is. As growth accelerates, financing from the dollar is still close to zero and investors use credit to invest in assets, prices will go to crazy levels,” he said.

“But the developing market has its own engine of growth – its young and upward-rising population,” he continued.

Location, location, location
The booming property market has been fingered as one of the indicators of a bubble forming. Singapore and Hong Kong now rank as one of the most expensive real estate markets in the world, alongside London and Monaco.

“The property market is more of a concern for us. The Hong Kong property price is expected to go down from here to 2014, there is a 10 per cent to 15 per cent downside and mortgages interest rate is expected to increase,” Ho said.

“Property prices in North Asian countries like Hong Kong, China and Taiwan has been quite high so there is danger of a bubble forming,” he said.

However, Ho is less concerned about the property market in China as the rapid urbanisation of the population is driving demand in the major cities.

“We don’t feel a lot of latent risk in China for property prices to go down in the next 6-12 months. There is some tightening on the credit side but Chinese banks are still willing to lend so mortgage financing won’t be tightened so much.”

That does not mean that the smaller cities are going to be spared. Coutts’ Dugan sees bubbles in China’s minor cities where “developers over-speculated and income growth is insufficient to bring the required buyers. But if you look at major cities, there is a shortage of supply and the imbalance is pushing housing prices up.”

“If you rank the Asian countries in terms of vulnerability, Malaysia is still vulnerable but is more likely to muddle through,” Dugan said.

China less of a worry
China does not rank very high in the bubble watch even though the banks tripled the amount of bad loans written off in the first half of 2013. The Ministry of Finance has recently given banks greater autonomy in writing off loans that have gone sour. From 1 January 2014, Chinese banks may write off private business loans of less than 5 million yuan ($826,000) without asking for permission after attempting to recover the money for one year. Loans of up to 10 million yuan ($1.65 million) to small enterprises and the agricultural sector may also be written off after one year.

“[Chinese] Banks will always be supported by the government. The government knows it has to unwind a lot of lending to the state-owned enterprises. If the enterprise does not pay, the state will. The government will not guarantee this because they want to encourage prudent lending by the banks. Unlike in other parts of the world, if something goes wrong, the government can plug the gap - they have sufficient resources and reserves. The problem can be solved within China’s borders with their own money,” said Dugan.

Volatility still the theme
Even though the analysts tend to agree that the longer-term economic growth outlook for various markets in Asia is solid, a spanner might be thrown in the works with the spate of elections across the region.

“Indonesia is in the midst of a cyclical adjustment and has already cut fuel subsidies significantly. It will need to press on with this but at the same time there is similar political uncertainty with the elections next year,” Ho said.

Elections are due in Thailand, Indonesia and India from February to the middle of 2014 and the jury is still out as to who is leading in each country. The uncertainty has led to jittery investors and low consumer confidence. The Thai consumer confidence index has fallen to a two-year low as streets are closed and a 60-day state of emergency is enforced in the country’s capital, Bangkok, starting from 21 January 2014.  

With such a bleak start to the year, Ho does not see the silver lining yet. He said “the last five to seven years has been pretty much doom and gloom and the market may continue to behave like this as long as we still have structural issues in the global economy. The unemployment rate and public debt in the US and Europe is still high, so there will continue to be market volatility”.

Titien Ahmad is a contributor to this publication. To see a previous feature article, click here.