Analysts stay positive on Asia equities as regional markets rally after dovish Fed comments

ANALYSTS remain positive on Asian markets, after the outcome from the latest Federal Open Market Committee (FOMC) meeting proved to be more dovish than expected.

With the risks from the FOMC event over, the positive momentum for stocks should continue as focus reverts to earlier themes and as yields continue to fall, analysts said.

The Federal Reserve on Wednesday (Mar 20) kept interest rates unchanged, with the Fed Funds rate target between 5.25 and 5.5 per cent.

While the move was widely expected, markets reacted positively to the Fed’s decision to maintain three cuts this year despite higher inflation prints in January and February.

Prior to the meeting, there were concerns that the Fed would take a shallower rate-cut path due to bumps in the inflation rate, analysts noted.

Regional bourses largely ended higher. The Nikkei 225 climbed 2 per cent, the Hang Seng Index rose 1.9 per cent, the Straits Times Index was up 1.4 per cent, the FTSE Bursa Malaysia KLCI gained 0.4 per cent, and the Indonesia Stock Exchange inched up 0.1 per cent.

The Fed raised its 2024 core inflation projections without any shift in the expected cutting path, noted Steve Englander, Standard Chartered’s head of global G10 foreign exchange research and North America macro strategy.

Although the Fed kept the three cuts “only by the narrowest of margins”, he said this signals that the central bank does not see moderately higher inflation as a barrier to cutting policy rates.

“The market debated whether this was hawkish or dovish but, correctly in our view, settled on a dovish read,” Englander said.

Analysts at Nomura also said the Fed decision was dovish relative to pre-meeting expectations, which meant a relief for stocks.

“Asian stock investors should like the outcome with a possibility of a relief rally,” said the research team comprising Chetan Seth, Anshuman Agarwal and Ankit Yadav.

As a result, markets will likely price a higher probability of inflation tolerance, said Ray Sharma-Ong, investment director of multi-asset at Abrdn.

“So long as inflation continues to trend lower, the Fed is likely to begin cutting in June,” he added.

With the Fed reiterating its intention to cut rates three times this year, along with plans to slow the pace of quantitative tightening in the next few meetings, Sharma-Ong also expects both front-end and back-end yields to moderate in the months to come.

This should benefit higher-yielding Asia credit, he said.

Falling yields should also benefit long-duration equities, as well as regions with high exposure to tech stocks – such as Korea and Taiwan – and Asia real estate investment trusts (Reits), Sharma-Ong added.

Meanwhile, the difference between US and Asia rates will likely also narrow, which should benefit high beta and higher-yielding Asian currencies such as the South Korean won, Taiwan dollar, Indonesian rupiah and Indian rupee, he noted.

A team of analysts at DBS Group Research noted that the Fed’s move brings relief to earlier concerns of a lesser number or delay in cuts.

This should provide respite for the Reits, which have been sold down aggressively over the past two months, the team said.

While the expectations have largely been priced in, markets are likely relieved that the Fed is not swayed by recent bumps in inflation reading, its Reits team said.

Top picks for its Reits team in the Singapore market include Frasers Centrepoint Trust, CapitaLand Ascott Trust, Lendlease Global Commercial Reit, CapitaLand Integrated Commercial Trust, Mapletree Logistics Trust and Digital Core Reit.

The Nomura team expects Asian equity investors to return their focus to earlier themes of artificial intelligence momentum, China economic and earnings recovery, and the path for US inflation ahead.

The team said it remains “modestly constructive” on Asia excluding Japan stocks. This is supported by its baseline view of a US soft landing, a strong Asian earnings recovery boosted by prospects of semiconductor and chip companies, and a modest cyclical recovery in China.