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Pain-or-gain debate grips Asian investors as Fed decision nears

They fear regional currencies will fall further, and mull over whether the prospect of rate hike is already priced into stocks

On Thursday, Asian markets will trade on the outcome of the Fed meeting. Some fund managers see a good chance for a relief rally for stocks.


AHEAD of a broadly expected rate hike decision by the US Federal Reserve on Wednesday, global investors remain on the sidelines when it comes to allocating to Asia.

In Singapore, the benchmark Straits Times Index (STI) slid further on Monday to the 2,800-point level, near 3.5-year lows hit at the end of September.

Investors are wary of Asian currencies falling more, dragged down by liquidity attracted back to the US as rates rise there. As a significant part of Asia's economy depends on China, Asian currencies will also fall with the Chinese yuan as China policymakers manage a gradual depreciation to deal with an economic slowdown.

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But after double-digit percentage falls year to date for many Asian stocks, those already in the market are wondering if rate hike fears are priced in.

Andrew Gillan, head of Asia ex-Japan equities at Henderson Global Investors, said Asian stock valuations are fair. However, earnings growth has been lacklustre. Demand was affected by prices falling due to currency weakness, he said.

Mr Gillan said Singapore banks, the only Singapore stocks his funds hold, have underperformed due to fears over exposure to loans made to companies in South-east Asia and Greater China. Yet the banks reported resilient results, he said.

Kenneth Tang, senior portfolio manager at Nikko Asset Management Asia, said there is a good chance for a relief rally for stocks after the Fed decision.

"There've just been so many people stepping away and waiting for this event, it just feels like it's been priced in," he said.

On Thursday morning, Asian markets will trade on the outcome of the Fed meeting. Markets expect the Fed to raise the target for the US federal funds rate, which is the interest rate that banks charge each other for overnight loans.

This rate has stayed near zero for the last seven years as the Fed wanted to keep borrowing costs low to stimulate the US economy after the global financial crisis. But as the economy recovers, borrowing costs have to adjust upwards to keep inflation low.

According to Bloomberg, Fed funds futures imply a three in four chance that rates will rise by 0.25 percentage point from 0-0.25 per cent now to 0.25-0.5 per cent after Wednesday's meeting.

After the first hike, the market is pricing in just one to three such 0.25 percentage-point hikes next year. The Fed, based on its September "dot plot" chart, was a bit more hawkish, expecting three to five.

OCBC economist Wellian Wiranto said in a Monday report that markets will be watching to see if the Fed's hike path forecast will change. This will affect sentiment and Asian markets, he said.

"One of the key ways in which market reaction to a rate hike can be contained will be via a downtick in rate expectations by the Federal Open Market Committee (FOMC)," he said.

"While the FOMC members are unlikely to paint themselves into the corner by matching their projections with market expectations, they probably see some room to lower them from September's level, hence establishing what has often been termed as a 'dovish hike' scenario," he said.

Looking ahead, people will also be watching how China lets its currency depreciate, Mr Gillan said.

"With its inclusion as a reserve currency, China will be looking (for the yuan) to be relatively stable. A 5 per cent type of depreciation, markets can probably handle. If it's 10 per cent or more, it will be challenging for other economies," he said.

In Singapore, institutional brokers like Citi, Credit Suisse and Goldman Sachs are targeting the STI to trade at around 3,000-3,100 points one year from now. At 2,815.04 points at Monday's close, the STI is down 16 per cent year to date in Singapore dollar terms and 21 per cent in US dollar terms.

The gloomy picture for Singapore stocks is due to oil and gas companies being battered by the oil price crash, and how a rate hike will make real estate investment trusts (Reits) and developers less attractive.

Kelvin Tay, regional chief investment officer at UBS Wealth Management, said: "We expect the Singapore dollar to weaken to 1.44 (to the US dollar) over the next three months and Sibor (Singapore interbank offered rate) and SOR (swap offer rate) to start trending upwards, which would in turn hurt the Reits and developer stocks." Sibor is used to price home loans while SOR is used to price commercial loans.

Though fund managers like the Philippines and Indonesia, there are low expectations for South-east Asian economies next year.

Said Ewen Cameron Watt, global chief investment strategist at the BlackRock Investment Institute: "South-east Asia is not going to be recovering terribly strongly unless commodity prices bottom and the dollar falls."