Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Stock markets in Asia have given hefty returns to investors after the onset of the pandemic, but the sentiment has changed in 2022. Asian stocks have been on a freefall since the beginning of the year due to the war in Ukraine, rising inflation, higher interest rates, and the hefty valuations that Asian equities have been commanding.
As of April 29, the MSCI AC Asia Index, which tracks large- and mid-cap firms in developed and emerging markets, has fallen 13.49% in 2022, while registering a drop of 18.38% over the past year. On the other hand, the MSCI World index is down 13.03% in 2022 and has slipped 3.52% in the past year.
What’s happening in Asia?
In January, Asian stocks tumbled to their lowest in nearly 15 months after the US Federal Reserve said it will increase key interest rates, stoking fears of a rate rise by central banks around the world. To understand the rationale behind the rate rise, we must first look at the inflationary pressure on Asian economies.
Global commodity prices rallied over the past year as economies re-opened and picked up steam, with a pent-up demand sending costs soaring. Russia’s invasion of Ukraine has choked the supply of some commodities, especially oil. This in turn is leading to higher inflation in Asian economies and higher prices of different products.
“Most APAC countries are net importers of the commodities seeing price spikes, and the negative terms of trade shock will subtract from near-term GDP growth,” said Swiss Re in a note. “The Asia Pacific (APAC) region will not escape the global stagflationary (higher inflation and slower growth) shock. In Asia, rising food prices will likely contribute more to inflation than higher oil and energy prices.”
Swiss Re says that in Asia food accounts for a larger share of total expenditure and the consumption basket used to calculate CPI (over 40% for India, Philippines and Thailand, for instance).
Taking stock of the rising food prices and inflation, IMF cut its growth forecast for Asia Pacific to 4.9% in April, a 0.5% decrease over its January forecast, and much lower than last year’s 6.5% growth rate.
“Slower growth and rising prices, coupled with the challenges of war, infection and tightening financial conditions, will exacerbate the difficult policy trade-off between supporting recovery and containing inflation and debt,” said IMF in a blog post.
Asian stocks take a beating
Asian stocks have seen massive outflows of foreign capital in the first four months of 2022, due to central banks raising interest rates and China lockdowns weighing on the region’s growth. Data from Refinitiv showed that overseas investors offloaded $14.22 bn of Asian equities in April, a Reuters report said. In the four months of 2022 foreign investors have sold $45.76 bn worth of Asian equities, the most in the first four months of a year since 2008.
However, Southeast Asian countries are seeing higher interest from foreign investors, with Indonesia attracting $1.57 bn, Thailand seeing $249 m and Vietnam getting $175 m for equities. But why are these countries bucking the larger negative trend seen in broader Asia?
“Southeast Asian risk assets look more attractive than North Asian equities,” said David Chao, global market strategist for Invesco Ltd in Hong Kong, in an interview with Bloomberg.
Malaysia exports oil while Indonesia has large exports of coal, palm oil and natural gas among others, which are helping drive gains in certain equities. “Net exporters, especially those of minerals, oil and agricultural commodities, the price spikes will add to growth momentum. These include Australia, New Zealand, Malaysia and Indonesia,” said Swiss Re in a note.
What should investors do with Asian stocks?
Last week, Morgan Stanley said Asia and emerging market equities are entering the late stage of a bear market while acknowledging that risks were “still potent” with a possibility of further downside.
“We continue to like commodity producers such as Australia and Brazil, which are benefiting from high agricultural, energy and metals prices. We also favour Japan, which, unlike emerging markets, has more than half of the index deriving its earnings overseas and therefore benefits from a weaker yen,” said Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research, in a podcast.
“In general, Asian companies are fundamentally healthy, with low debt and rising cash balances, and Asia stock valuations are cheap compared to major asset classes,” said UBS Asset Management.
Geoffrey Wong, Head of Emerging Markets and Asia Pacific Equities at UBS, says that it pays to be active within Asia, especially in small caps. “Asia is a changing region – and that gives rise to big trends and themes. If you’re able to identify the winners from these trends and themes and avoid the losers, you can make very strong active returns which can amount to very healthy total returns for your portfolio.”
