Financial markets in Emerging Asia appear relatively stable despite signs of stress in the financial system, and market sentiment remains mildly positive. This is attributed to the cautious suspension of restrictive monetary policies, sustained economic expansion driven by robust domestic demand and declining headline inflation.
Financial markets in Emerging Asia are diverse in terms of business climate, institutional or political developments, fiscal and monetary policies, and sector strengths, among other factors. Therefore, financial markets exhibited mixed reactions at the country level to the tight monetary-financial-fiscal nexus worldwide.
Some equity markets in the region weakened slightly in the first half of the year as they struggled to keep pace with unfavourable conditions. Benchmark equity indices were observed to rise and fall monthly, with significant fluctuations particularly in the first quarter, following more restrictive monetary policy rate decisions, both internationally and domestically. However, the financial market turmoil in early March in the banking sector in the United States and Europe had limited impact, as banks in the region demonstrated strong capitalisation, high liquidity coverage ratios, sticky deposit bases and well-diversified corporate deposits across industries. The impact on benchmark equity indices in China and the major ASEAN economies (Indonesia, Malaysia, Philippines, Singapore and Thailand) was minimal.
The second quarter of 2023 witnessed a cautious pause by some monetary authorities, which helped to stabilise the impact of elevated interest rates worldwide. China’s equity markets continued to weaken in April as economic indicators belied expectations of a strong economic rebound this year. In the same month, markets in India, Indonesia and the Philippines rallied as monetary authorities in advanced economies and Emerging Asia showed no signs of further interest rate hikes, and inflation started to moderate. In May, however, major economies in the ASEAN region, namely Indonesia, Malaysia, Philippines and Singapore, accumulated losses as risk sentiment weakened ahead of the US debt ceiling negotiations and further tightening of benchmark interest rates by the Fed and the European Central Bank (ECB). By the middle of June, equity markets had begun to recover, with major benchmark indices posting moderate to significant positive gains (Figure 7).
Equity markets in the region are expected to maintain a positive outlook in the near term, underpinned by factors including a bullish outlook for emerging sectors, particularly in the services arena, such as e-commerce, other digital technology-based services and the services arm of the manufacturing industry. Most governments in the region are increasing their capital outlay to bolster infrastructure development, which should boost business expansion in supply chain-related industries, the manufacturing sector and the labour market. Furthermore, the impact of El Niño is expected to be mild, with the expectation that government policies to cushion food price inflation will be in place. For example, the Philippines has rolled out a 2023 El Niño Mitigation and Adaptation Plan, while Indonesia plans to prepare approximately 500 000 hectares of agricultural land targeting six regions to ensure the availability of national rice supplies and control the potential impact of El Niño.
