As the latest political convulsions in Washington hurt appetite for riskier assets globally, some were quick to put in sell orders on Asian stocks this week. And all of a sudden, emerging markets don’t sound so appealing any more is one adds in the rumblings from Brazil.
But some analysts disagree. For example, handsome bounce back has been previously staged by the Korean won, which has been hit by risk-off waves before — such as the April Syria attack. Asia may be poised to weather the latest international political worries from outside the region as well and benefits from the world’s fastest economic growth.
Worries about a hard landing in China, along with lack of clarity over Chinese policy shifts and the risk of more aggressive U.S. monetary tightening are factors that’s hurt Asian assets most in recent years. But thanks to what policy makers there signal is a measured campaign to contain leverage, for now, China concerns are limited. And there’s little indication it’s about to step up interest-rate hikes after a softer run of economic data as far as the Federal Reserve is concerned.
“This could be a great buying opportunity across Asia, where earnings have been strong, trade is picking up and China is doing well,” said Nader Naeimi, head of a dynamic investment fund at AMP Capital Investors in Sydney. “If markets fall further, we will be looking to get back in slowly.”
As appetite for risk was impaired by reports that President Donald Trump might have asked for an end to a probe into his former national security adviser, the MSCI Index of Asia Pacific stocks excluding Japan dropped more than half a percent for a second day Thursday. There was a drop in Asian currencies including the South Korean won, Indian rupee and Taiwan dollar.
Naeimi said that there may be further scope for a pull-back by the recent run-up in Asian stocks. He said that some sectors in particular might not be great buys — “technology is showing signs of euphoria.” According to the International Monetary Fund, compared with a global pace of 3.5 percent and a rate of 2 percent for advanced economies, emerging and developing Asian economies are poised to expand 6.4 percent this year, and this is worth considering.
“Fundamentals in Asia are better than other emerging markets,” said Takahide Irimura, an economist in Tokyo at Mitsubishi UFJ Kokusai Asset Management Co., which oversees the equivalent of about $114 billion. That may help explain why “Asia seems to be less hit by the risk-aversion and sell-offs this time,” he said.
Thanks in part to contained inflation rates in most of the region, one proviso for fixed-income investors is that Asian bonds have lower yields than others. That leaves higher-yielding markets such as India and Indonesia as “probably the most attractive”, for Irimura.
However, in the form of less competitive exchange rates a softer U.S. dollar poses a risk to Asian growth. However, some tailwinds to the region is offered by a recent upturn in global trade. And without the overhanging danger of escalating capital outflow pressures, it gives Chinese policy makers further space to focus on domestic reforms.
“At the end of the day, the Asian fundamental story is very strong and China is the biggest driver,” Naeimi said
(Adapted from Bloomberg)