March headwinds return for Asian stocks, with a twist

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(Bloomberg) – This sounds like déjà vu for Asia, with a dollar rebounding, concerns about bond yields and weakness in China threatening to weigh on equities like they did in March. But investors say the market is much more resilient this time around.

The negative impact of the Federal Reserve’s hawkish pivot outweighs a growing discount to major peers and a drop in coronavirus cases in the region. A fall in bond yields is also helpful, with those on 10-year US Treasuries slipping to 1.44% from over 1.7% in March.

All of this suggests that a period of underperformance similar to that of March – when the MSCI Asia-Pacific Index fell 1.5% and was four percentage points behind the benchmark index of global equities – is unlikely.

“Yield-sensitive groups – which fell on inflation and tightening fears earlier this year – tech, utilities, commodities, healthcare could start to outperform groups that have dominated in the world. start of the year, ”said Thomas Hayes, president of Great Capitale des Collines. The New York-based fund manager increased his allocation to Chinese tech stocks after the Fed’s move, particularly Alibaba Group Holding Ltd., he said, citing lower prices after the recent sell-off.

Indeed, valuation seems to be a key reason for maintaining allocations to Asia for some investors. The benchmark is trading at just 15.8 times its estimated earnings for the next 12 months, and its multiple deviation from the S&P 500 Index remains below the five-year average, according to data compiled by Bloomberg.

“I expect Asian equities to be more resilient this time around given the valuation differential,” which has widened since February, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.

This gap is even larger compared to 2013, when the appearance in Congress of then Fed Chairman Ben Bernanke triggered a “tantrum” in emerging market exits, causing the Asian gauge to drop. ‘about 11% over the next month. That year, Asian stocks were trading at a modest 1.5 point P / E discount to their US counterparts, compared to an average difference of five points in 2021.

Expectations of a repeat of the 2013 cash outflows are mostly non-existent, with investors pointing to the Fed’s relatively soft language regarding shrinking and strengthening external balances in Asia.

China Headwind

However, slower growth in China is a headwind. Chinese stocks are the worst performing this month in Asia, with the CSI 300 index down more than 4%, as policymakers seek to slow the pace of credit growth and the government steps up intervention in the steps.

READ: China quietly steps up market interventions

Union Bancaire Privée reduced the size of its overweighting in Chinese equities ahead of the Fed meeting as the country’s economic cycle is “more advanced” than other regions and regulatory risks remain significant, according to Kieran Calder , head of Asia equity research.

On the bright side, a decline in the five-day continuous variation of Covid-19 cases to a two-month low and increased vaccinations reinforce broader optimism about growth in Asia. Countries are considering travel bubbles again and even Japan, lagging behind on vaccines, is making visible progress.

And when it comes to the dollar’s jump, its rebound is seen as short-lived by JPMorgan Asset Management and Goldman Sachs Group Inc, despite the hawkish lean of Fed policymakers.

“We don’t see the strength of the dollar lasting now, in fact we see more of a downside from here,” said Adrian Zuercher, head of global asset allocation at UBS Global Wealth Management CIO. “The Fed was more hawkish than expected at this meeting, but with what it plans for the end of 2023, it still looks like a hawkish blip in an accommodative overall position.”

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