Business Maverick

Business Maverick

Frightful February ends ‘buy everything’ calls

Frightful February ends ‘buy everything’ calls
A customer counts dollars and euros inside a foreign currency exchange bureau in the Beyoglu district of Istanbul, Turkey, on Thursday, 14 May 2020. (Photo: Kerem Uzel/Bloomberg)

In just one month, emerging Asian assets have gone from a buy to sell. And all signs point to continued caution in March.

Outflows from north Asian stocks gathered pace, regional currencies languished at multi-month lows and global funds dumped local bonds in a particularly brutal February. The optimism evaporated as a repricing of US rate-hike bets eroded appetite for risk assets and sent investors back to the safety of the dollar.

The brief rally in developing-nation assets highlights the difficulty in calling the peak in US rates, as robust data dash hopes for a Federal Reserve pivot. Most analysts don’t see a recovery just yet, with Goldman Sachs Group warning that emerging-market debt may face a repeat of the risks seen in 2022.

“The repricing of rates has put paid to the rally in emerging markets and rates, and it’s hard to see a turnaround,” TD Securities strategists including Mark McCormick wrote in a note. “USD strength can persist for a bit longer, as the market tries to navigate the balance of global growth recovery and higher rates.”

The outlook is a reversal of the euphoria seen in January when virtually every emerging Asian asset was a buy. Regional stocks gained more than 8% and currencies rallied while bonds posted one of their best months based on data going back to 2008.

A ray of hope remains: Beijing may unveil more stimulus at the National People’s Congress meeting in March, a gathering which typically sets the tone for major economic policies. A pro-growth stance would provide a fillip to regional assets, in much the same way that China’s reopening late last year generated a rally in risk assets.

As markets brace for more volatility ahead, here’s where regional assets stand.

Stock shock

The MSCI EM Asia Index fell about 7% in February in its biggest monthly decline since September. The gauge has dropped below its 200-day moving average, a measure of market momentum, which may signal that more weakness lies ahead.

A stronger dollar is contributing to a selling of Asian assets, as weaker local currencies worsen current accounts, while corporate borrowers with dollar-denominated debt suffer. Foreigners withdrew more than $1-billion from South Korean and Taiwanese equities last week, data compiled by Bloomberg showed, with doubts returning over the recovery of chip manufacturers. 

Meanwhile, US-based hedge funds ramped up sales of Chinese ADRs last month amid tightening financial conditions, Morgan Stanley said. In tandem, implied volatilities for Hong Kong-listed shares have climbed toward this year’s high.

“A good part of what happens will also be dependent on sentiment after the March sessions,” said Christina Woon, investment director for Asian equities at abrdn plc, referring to China’s political gatherings. While still positive on China’s recovery, we “are perhaps more cautious around expectations of any large stimulus out of March sessions,” she added.

Bond outflows

An index of emerging Asian government bonds posted its biggest monthly decline since September as higher US yields lure funds away from developing markets. The yield on 10-year Treasuries jumped 41 basis points in February, as it closed on the 4% mark again. 

Overseas investors pulled around $400 million from Indonesian sovereign debt in February after pumping in a record $3.3 billion in January, according to data compiled by Bloomberg going back to 2009. Outflows from Thai securities reached $1.1 billion, the biggest monthly withdrawal in almost a year.

“With 10-year US Treasuries back at around 4.0% yield, it would be challenging to expect global investors to increase allocations to Asia bonds,” DBS Group Research strategists Duncan Tan and Eugene Leow wrote in a note. 

Currency calls

A gauge of Asian currencies dropped almost 3% in February to underperform its emerging-market counterpart. South Korea’s won and the Thai baht headlined the losses in regional currencies, while the offshore yuan weakened more than 3% in its worst February on record.

“The clouds of uncertainty remain with us — the market’s consensus view that inflation would head lower through the year has clearly been challenged and this has seen a repricing in rates and short-end bond yields,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note. “The dollar has been a place of refuge while chipping away at shorts in equity markets and gold has worked.” BM/DM

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