Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
The first half of 2022 has been painful for investors around the globe and while a turnaround was expected in the latter half, inflation has become a sticking point for central banks. Asian financial markets had their worst month in September since the beginning of the pandemic, as fears of a recession and a rallying US dollar put bulls on the backfoot.
The MSCI Asia ex-Japan Index, which tracks the large- and mid-cap companies in 10 Asian countries except for Japan, has declined about 13% in September alone, its biggest drop since March 2020 when lockdowns sent investors scurrying. Asian financial markets have been a mixed bag, with certain equity markets remaining buoyant in the face of economic fallout, while currency markets have seen the red across the board. Asian bond markets experienced volatility but are now regaining some footing as issuances have increased.
Global financial markets are reeling from a hawkish US Federal Reserve, which hiked interest rates for the third consecutive time by 75 bps. While the outsized rate hike was expected, the comments by US Fed Chair Jerome Powel indicate that the central bank’s rate hikes are far from over. Concerns over a recession in the US are rising, while the outlook for Europe has darkened as the region is facing an energy crisis going into the winter due to supply issues from Russia.
However, there is a silver lining in Asia. “Asia quality strategies focusing on companies with stronger financial health and pricing power will remain more resilient against further inflationary and/or recessionary shocks,” says Cambridge Associates in an insight.
Winners and losers in Asian financial markets
Investors are turning away from China due to the country’s strict zero-Covid affected earnings of listed firms. The World Bank recently said it expects China to grow at 2.8% in 2022, down from 8.1% in 2021. Rising inflation has hit Chinese shores but the central bank has been reluctant of raising interest rates to ensure liquidity in the market for better economic growth. However, bond market investors saw barely any impact. The S&P China Bond Index posted a marginally lower loss during the month of September.
However, Chinese equities took a beating, with the CSI 300, a capitalization-weighted stock market index that consists of 300 companies listed on Shanghai or Shenzhen exchanges, having shed more than 5% in the past month. Chinese financial markets continued to be under pressure due to the fallout of the property sector, even as the government tries to implement measures to support real estate developers.
The yuan is reeling under the effects of the US Fed rate hike, which propelled the USD/CNY pair past the key threshold level of 7. The widening monetary policy gap eroded the value of the yuan against the US dollar, which is riding high against all major currencies.
South Korea, an export-based economy, is seeing the impact of a global slowdown. The Bank of Korea has been quick at raising interest rates to fend off inflation, but fiscal measures have impacted investor sentiment. The Korea Composite Stock Price Index or KOSPI declined more than 10% in September.
The Korean won is among the worst performing currencies in Asia, dropping to its lowest level in over 13 years last week. This prompted an FX intervention, with Korean authorities selling $15.4 bn in foreign exchange markets in the three months through June. Data shows that the Bank of Korea’s foreign reserves fell to $436.4 bn in August, but the country has continued to have a current account surplus despite experiencing a slowdown.
In Japan, equities and currency have taken a beating from the hawkish US Fed. TOPIX was down over 4% in September, while the yen saw levels previously seen during the 1998 Asian financial crisis. The Bank of Japan has held onto its ultra-loose monetary policy and is now the only central bank in the world with negative interest rates.
Opportunities in ASEAN and India
Indian equities also suffered from the headwinds from global markets, with the Sensex and Nifty50 shedding more than 4% each. However, among the various Asian financial markets, India has shown resilience over the past quarter. The MSCI India Index rallied nearly 10% during the quarter that ended September 30. Investor interest in India is increasing as investors become averse to investing in China, which has seen a $5 tn rout in equities since early 2021.
“India is the world’s largest democracy, and is starting to see a significant ramp-up in investment from multinationals looking to diversify supply chains that have previously been over-exposed to China-related risks,” Colin Croft, Investment Manager, Global Emerging Market Equities, at Jupiter Asset Management, told AsiaFundManagers.
However, the Indian rupee has continued its slide, weakening past 81 against the greenback, hitting an all-time low. The rupee was joined by the Philippine peso to hit an all-time low in September and is expected to weaken further as the trade deficit widened. The Philippines Stock Exchange Composite Index (PSEi) has fallen over 13% in the past month.
Elsewhere in Asia, Indonesia’s Jakarta Composite Index fell 6.18%, Thailand’s SET Index fell nearly 4%, Singapore’s STI was down 3.37%, Bursa Malaysia KLCI fell 6.91%, Taiwan’s TAIEX fell nearly 10%and Australia’s S&P/ASX 200 shed 5.77%.
ASEAN countries are doing far better than their other Asian peers, as seen from the available market data. The MSCI ASEAN Index is up about 1.4% during the quarter that ended September 30 and has outperformed the MSCI Asia Pacific ex-Japan and MSCI World indexes.
