The US dollar’s relentless rise is threatening to trigger more outflows from Asia’s emerging-market shares, spoiling hopes of the region making a comeback in the second half of this year.
A gauge of Asian currencies has slumped to its lowest in more than two years, an ominous sign for equities given their strong relationship with moves in foreign exchange.
The MSCI Asia ex-Japan Index has fallen 20 percent as foreign investors took US$71 billion out of emerging Asian stock markets outside China so far this year, already double last year’s outflows.
Photo: Reuters
The US dollar has steamrolled through global currency markets, benefiting from bets on aggressive US Federal Reserve rate hikes. A stronger greenback bodes ill for Asian stocks when it signals lower risk appetite and is seen as negative for growth in emerging economies, many of which rely on imports priced in the currency.
Tech-heavy Asian markets such as South Korea and Taiwan look particularly vulnerable as higher global bond yields and recessionary headwinds are hurting valuations and the demand outlook.
Stock benchmarks in the two nations are among the worst performers in the region this year, and foreigners have net sold a combined US$50 billion of their shares.
For less export-reliant markets, weaker local currencies worsen national balance sheets and company profit margins, as corporate and sovereign borrowers suffer from higher repayments on dollar-denominated debt.
In India, one of the world’s biggest oil importers, the rupee has tumbled to a record low as the nation faces widening current-account and fiscal deficits.
Meanwhile, the hands-off approach by Thailand’s monetary authority has resulted in a slump in the baht, one of the big decliners in emerging-market currencies this year. Further currency weakness could threaten the resilience their stock markets have shown this year.
Chinese stocks, which experienced a slew of bullish calls last month, have taken a sharp turn lower this month, adding to Asia’s woes. A key gauge of shares listed in Hong Kong is down more than 9 percent amid renewed COVID-19 concerns, an intensifying property crisis and fresh regulatory scrutiny of the tech sector.
Sometimes it doesn’t take much for a trickle in foreign outflows to turn into a flood, said Siddharth Singhai, chief investment officer at New York-based hedge fund Ironhold Capital.
“Foreign investors are very fickle. They tend to move in and out very quickly,” he said.
Asia’s infrastructure, home building and construction stocks will be more affected by a stronger US dollar given their sensitivity to interest rates, he added.
For those seeking to pick up some beaten-down shares, Taiwanese telecoms and consumer staple stocks, Indian IT firms, South Korean healthcare names and Malaysian energy stocks were consistent outperformers during similar periods of depreciating Asian currencies in the past decade, a study by BNP Paribas Securities analysts last year showed.
“From a flows and sentiment perspective, yes Asian stocks tend to underperform in the short term against a rising dollar,” said Christina Woon, investment director for Asia equities at Abrdn PLC.
“You can also find a number of beneficiaries, such as exporters, or companies that have more domestically focused tailwinds where a stronger dollar is less of an issue,” she added.
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