Trading the Asian markets

INTEREST in trading Asia has risen in tandem with the region's growth story. With the expansion of advanced economies projected to remain at modest levels, the higher growth expectations of emerging Asia make it a compelling investment theme for the next couple of years. The development of Asia and increased cross-border flow of capital present plenty of opportunities for traders.

Two major themes recently dominated the Asian financial markets. First, the anticipation of a precise timeline for the increase in the US Federal Reserve's (Fed) interest rate stoked market volatility as traders expressed their varying directional biases through their positioning. Lately, markets have pushed back expectations of the Fed's rate normalisation to the second half of the year. The delay bolsters current loose monetary conditions, led by the European Central Bank and Bank of Japan's (BOJ) considerable expansion of money supply (also known as "quantitative easing"). Over one-third of the 25 central banks who have eased monetary policy are in Asia (ex-Japan). In spite of such "coordinated" action, inflation expectations have not quite reacted as hoped, owing to sustained low oil prices depressing prices. An implication of this is that the present state of easy money could persist for a while.

Second, mainland China and Hong Kong shares have rallied to incredible levels, spurred on by several policy developments. A one-two combination of People's Bank of China easing and liberalisation of equity trading rules broke the floodgates. The FTSE China A50 Index soared past 13,000 to multi-year highs while the Shanghai Shenzhen CSI 300 is targeting 4,500. In addition, the valuation gap between A-shares and H-shares lured mainland investors to Hong Kong's stock market via the Stock Connect facility. The Hang Seng Index soared 12.5 per cent in the first two weeks of April to test 28,000. A-shares are Chinese firms incorporated in China and traded on the Shanghai and Shenzhen exchanges, while H-shares are Chinese companies incorporated in China and listed in Hong Kong. H-shares are open to foreign participation. The torrent of hot money from mainland China into Hong Kong has led to a 65 per cent spike in the share price of Hong Kong Exchanges and Clearing Ltd (HKEx), the territory's bourse operator.