Curse of the yield curve to lift as buffers boost Asian stocks

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(Bloomberg) – Asian equity investors fear the bond market signal of a U.S. recession could trigger another period of underperformance and have a cushion to fall back on.

Factors such as a more stable macroeconomic environment, stimulus measures in China and a boost from the reopening of economies give them confidence that history will not repeat itself. In the past, almost every time the yield curve for two- to 10-year Treasuries has inverted — a bearish signal for the US economy that was again triggered last month — Asia has trended to underperform its global peers.

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Asian bulls are hoping regional stocks can emerge as a relative haven after lagging for five quarters, as US investors worry about aggressive rate hikes from the Federal Reserve while those in Europe worry about the impact of the war in Ukraine.

“Unlike previous cycles such as the Asian financial crisis, Asia is better positioned to absorb the impact of inflationary pressures given macro stability buffers,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. “Asia also continues to offer supportive techniques, including modest valuations, light investor positions and reasonably strong fundamentals.”

In the previous five reversals since 1988, the MSCI Asia Pacific index fell an average of 1.6% over the following three months. That was lower than the global equities gauge by nearly four percentage points, according to Bloomberg’s calculations.

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But the bulls can point to 2005 and 2019 as two periods that bucked this trend, when the Asian index gained around 6% to 8%, in line with or slightly better than its global peers. This time, even though the indicator has lost around 2% since the curve’s inversion at the end of March, it is doing better than the MSCI World indicator by half a percentage point.

Better balances

Better current account balances from the 1997 Asian financial crisis and relatively high policy rates mean regional currencies are on stronger footing and economies have some leeway to fight a slowdown in growth . Meanwhile, parts of Asia still enjoy relatively subdued inflation rates compared to the rest of the world.

The region is also lagging behind the United States and Europe in reopening economies from coronavirus-related restrictions, especially in China which has a strict Covid-Zero policy. This means a boost from the easing of the brakes is ahead, which is already helping Southeast Asian equities outperform this year.

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china key

With hopes that the Chinese authorities will step in to support growth as promised in mid-March, the region’s largest economy – a crucial ingredient in past periods of outperformance – could emerge as another bright spot for the Asia. On Wednesday, officials announced they would step up monetary stimulus at an “appropriate time,” sparking speculation that could come as early as next week.

Inverted curves don’t matter if China rebounds: Review

“China remains very interesting as it is in a very different position than the Fed, we expect to see more monetary and fiscal stimulus to stabilize the economy,” said Catherine Yeung, chief investment officer at Fidelity International.

Still, bears can argue that China has been slow to roll out such policies and rising commodity prices remain a drag on the region. And a recession in the United States would naturally weigh on the export-heavy Asian economies.

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“Asian equities will not be immune if external risk in the form of a likely slowdown in US growth amid tighter policy leads to a significant decline in global risk sentiment later in the year” , Nomura Holdings Inc. strategists, including Chetan Seth, wrote in a note. this month.

Valuation buffer

That leaves valuations as a final part of the Asian equity reserve that should at least appeal to value-oriented global investors. The MSCI Asia Pacific Index is trading at a forward earnings discount to the S&P 500 and Stoxx 600.

“As the US struggles with high inflation and monetary policy tightening and the EU faces significant geopolitical risks and a possible energy crisis, Asian equities look quite attractive from a stock market perspective. valuation and macro and have a decent chance of outperforming for the rest of the year,” according to David Chao, global market strategist for Asia-Pacific ex-Japan at Invesco Ltd. “Asia is also relatively isolated from geopolitical risks and benefits from low consumer price inflation.

©2022 Bloomberg LP

Bloomberg.com

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