Best rally in decades for Asia to cool once reality sets in
A world-beating rally across Asian markets is starting to look precarious as some analysts caution China reopening euphoria will give way to the sober reality of a looming global recession.
Stocks are headed for their best month since 1998 and currencies have advanced the most since 2008, as bets for a softer Federal Reserve tightening and China’s pivot away from Covid Zero sparked a buying frenzy. That’s pushed a key Asian equity benchmark and some currencies into overbought territories from oversold in just a matter of weeks.
However, the stunning reversal has been built on tentative optimism rather than firm grounds — and in part driven by the short-covering of bearish bets. That means the gains may cool unless the Fed lives up to hopes of a smaller interest-rate hike and Chinese authorities continue to relax virus restrictions in the face of a spike in infections.
“The recent moves are so outsized and these expose investors to some correction,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. “When global growth is set to weaken, it is difficult to see currencies continue to rally if Asia’s export powerhouses are under pressure.”
The MSCI Asia-Pacific Index has jumped about 13 per cent in November, easily beating peers in the US and Europe. Some of the largest gains came from Hong Kong, where a gauge of Chinese shares trading in the city entered a technical bull market earlier this week.
An index of Asian currencies versus the dollar has jumped over 3 per cent so far in November, poised for its steepest monthly advance since 2008. The relative strength indexes of the Thai baht and Taiwan’s dollar have breached levels that suggest the currencies have been overbought. South Korea’s won is set for its largest monthly advance in 13 years.
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After suffering heavy losses for most of the year, investors appear keen to jump in lest they may miss out on a rally. While markets retreated on Wednesday (Nov 16), the pullback was modest with the MSCI Asia gauge falling less than 1 per cent.
But once the excitement subsides, more scrutiny will be given to every piecemeal change in the Fed’s signals and China’s pandemic policy shifts, putting markets at the risk of greater volatility.
“It does not appear to us if this is the beginning of a sustained rally as there is still some uncertainty on the path of the US inflation and Fed’s hiking cycle,” said Chetan Seth, Asia-Pacific equity strategist for Nomura Holdings. “The reality is that we have not yet seen a full reopening in China and we do not know when and how that happens.”
Economists surveyed by Bloomberg see US inflation running hotter through next year than they did a month ago and recession odds continue to mount against a backdrop of rising borrowing costs. Meanwhile, despite the latest loosening, China is expected to adhere to its policy of rooting out the virus into next year.
For sure, after months of underperformance, Asian assets were primed for a rebound and the growth potential for its developing economies remain large. Over the medium term, some money managers predict more gains.
“The rally was so fast that I would expect some pullbacks but a more dovish Fed talk and policy actions in China do argue for a further rally,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management.
Asian emerging-market equities outside China lured almost US$10 billion of inflows from global funds in November, the biggest since 2020. But the road ahead will be bumpy as traders navigate the risk of a US recession and potential policy whiplashes in China.
For Frank Benzimra, head of Asia Equity Strategy at Societe Generale, next year won’t be a repeat of 2022.
Asian central banks would have to pivot before the Fed and valuations are low, but “the Fed is not done hiking, and US financial conditions while easing, are still tight”, he said. BLOOMBERG
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