Asian markets see much to like in ECB's move

Singapore

Having had a few time zones to digest the European Central Bank's (ECB) overnight surprises, Asian markets on Friday decided that rate cuts and more quantitative easing were good for risk assets after all.

Analysts and economists expect equities to continue benefiting from the accommodative central banks, and that the euro currency will remain weak.

Regional equities rallied, breaking free of the overnight declines in the US and European markets. The Straits Times Index gained 0.70 per cent, or 19.74 points, to end at 2,828.86 for the best close of the week.

In Hong Kong, the Hang Seng Index added 1.08 per cent to close at 20,199.60 while the Japanese Nikkei 225 benchmark rose by 0.51 per cent to head into the weekend at 16,938.87.

"In delivering more than the market's expectations, the ECB should help confidence, encourage increased lending and raise inflation expectations," said Stefan Isaacs, deputy head of retail fixed interest at M&G Investments.

The ECB announced before the markets opened on Friday that it would cut all of its key interest rates. The central bank also committed to buying up more bonds as well as expanding its quantitative easing (QE) programme to also include, for the first time, investment-grade corporate debt.

"On a very basic level, QE is just injecting money into the economy in whichever way possible," said Mixo Das, Asia ex-Japan equity strategist at Nomura.

Those measures were more aggressive than investors had expected, and the US and European stocks initially climbed in response. But ECB president Mario Draghi then said at a press conference that the central bank did not expect to have to lower rates even further, snuffing out the exuberance and sending markets back down again.

OCBC economist Selena Ling said the market's disappointment that Mr Draghi had not sounded more accommodative may have been misplaced.

"Most central bankers don't want to be painted into a corner," Ms Ling said. "Having moved more than expected, it would not be surprising for him to say, 'Don't expect this every quarter.'"

But investors were also concerned about how close the ECB may have moved to its policy limits with the latest announcements.

"One thing that has been building up even ahead of this is the inherent fear that central banks may be running out of policy options," Ms Ling said.

Asian equities are expected to benefit from the improved risk appetite.

Mr Das said: "Within South-east Asia we think all equity markets will be going higher in the near term."

"But on a relative basis, over six to nine months, our preference is still for Indonesia and the Philippines more than Singapore, Thailand and Malaysia."

OCBC head of research Carmen Lee reiterated her firm's view that the Straits Times Index's current level has already priced in most negative factors and could present attractive value.

"As Singapore listed companies are generally more exposed to regional, Chinese and US economies, we believe that the direct impact in terms of corporate earnings may not be that significant, but the spillover positive impact on market sentiment could provide some support for the STI," Ms Lee said.

The effect on banks is not as clear.

Kelvin Tay, regional chief investment officer at UBS Wealth Management, said the ECB's policy should improve credit quality and reduce funding costs for banks.

"That said, negative interest rates will remain a drag on sector profitability, and could raise systemic risks, if banks are encouraged to make riskier loans to offset lower net interest margins," Mr Tay said.

Not surprisingly, the biggest impact of the ECB's latest move will be seen in Europe.

"Credit markets should be the primary beneficiary of the ECB with the ECB now overtly targeting credit spreads as its policy tool of choice," Union Bancaire Privee head of investment services Norman Villamin said. "Elevated credit spreads have been a significant constraint on financial conditions in Europe and this pivot in ECB policy should help to alleviate this headwind."

The impact on the real economy, however, may be muted.

"As seen with the initial European QE programme announcement early-2015 as well as the American QE programme previously, the benefits to the real economy tend to be incremental," Mr Villamin said.

UBS's Mr Tay reckoned that the euro will continue to weaken.

"We expect the euro to depreciate against the US dollar in the near term," Mr Tay said.

"The ECB is loosening policy at a time when US economic data has been strengthening, and we believe the market may be too complacent in pricing in only one further rate increase from the Federal Reserve this year. This could change after the Federal Open Market Committee meeting next week."

Investors should also keep in mind that the ECB is not the only central bank in town.

"Next up," Ms Ling said, "is the Bank of Japan and the US Fed. If they sound too hawkish, it's going to get markets moving the other way."