The global bond and stock selloff has revived unhappy memories of the 2013 taper tantrum, when the Federal Reserve's rumblings about removing stimulus shaved 17 percent off the value of emerging market stocks in less than two months.
For the current difficulties you can partly blame risk-parity funds, which buy benchmark government bonds to hedge against stock portfolios. When bond prices fall, these hedge funds have to sell their stock holdings to cover their positions.
Breathe easy, Asia. While the region's stocks on Friday joined the global equity rout, a repeat on the scale of 2013 is unlikely. The latest central bank-induced pain will hit Europe harder.
It's all about portfolio flows. Continental Europe has been the destination for hot money this year. As of the end of April, a whopping $119 billion of foreign funds have made their way into euro-area stocks, compared with the $141 billion net inflow for the whole of 2016, according to European Central Bank data. This year's surge constitutes more than 3 percent of the region's total market value. That money can quickly turn cold, and when it flows elsewhere, the hit to the region's stocks will be substantial.
Asia, meanwhile, is seeing healthy but not exuberant offshore interest. These investors bought a net $31 billion of the region's stocks this year, or just 0.3 percent of the total market value. So the current hand-wringing looks set to be neither as damaging nor as lasting as in Europe.
But investors can't be too complacent. Gadfly argued this week that the 20 percent-plus return for Asian stocks this year is by no means evenly distributed. Growth-oriented consumer discretionary and technology stocks have been driving the rally.
Bernstein Research's quantitative analysts looked at purchases by institutional portfolio managers, bullish recommendations from sell-side analysts and aggressive upward earnings revisions, and also concluded that growth has been the most recent story.
This week's latest flutter notwithstanding, Asian equities have had a good run this year on bets that earnings growth is here to stay. These companies will have to prove themselves this season -- when interest rates rise, stellar profit is needed to justify lofty equity prices.
The coming round of corporate reports will be particularly important for testing those earlier bets. The latest central bank jawboning? Not so much.
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