Die Another Day

Don't Panic. This Slump's Just a Blip

Treasury yields north of 3 percent won't stop the party.
Photographer: MirageC/Getty Images

Is it a blip, a correction or the end of days?

Stock markets in Asia tumbled Monday, extending the biggest global selloff in two years. Equity investors are fretting as Treasury yields approach 3 percent. On Friday, 10-year returns touched 2.85 percent, and the dollar rallied 0.9 percent.

Some context, however. While the MSCI Asia ex-Japan Index's 7.5 percent return in January was good, it's not unprecedented. In January 2001, the benchmark soared 12.8 percent. Also, U.S. government bond yields have been on a steady rise since the start of the year, and that hasn't stopped Asia from partying.

Decoupling

The dollar weakened in 2018 despite a steady rise in bond yields

Source: Bloomberg

The key to Asia's rally is a weak greenback. When investors pumped $13 billion into Chinese stocks last month -- the most in at least two years -- what they expected was not only capital returns, but foreign-exchange gains. No one's very interested in the Philippines because of the weak peso; as a result, the Southeast Asian nation is home to the region's worst-performing emerging market this year.

Hot Money

There's a strong positive relationship between local currencies and stock market returns this year

Source: Bloomberg

Note: The Hong Kong market uses offshore yuan and Hang Seng Index.

A currency's strength is dictated by interest rate differentials, in theory at least. And it's unclear the dollar will get much stronger. Based on the Bloomberg Dollar Spot Index, which determines currency weights according to their relative importance to the U.S. in terms of international trade, one-third of the dollar's value is dictated by the euro. But five-year bunds finally offered you something last week, after being negative since 2015.

Next in line is the Japanese yen, which dictates 18 percent of the dollar's value. There have been plenty of murmurings, from this columnist included, that the Bank of Japan will start stealth tightening, especially in a world of rising U.S. interest rates. After all, Japan's central bank already owns an unprecedented 45 percent of the nation's bond market; how much more entrenched can it get?

Interest rates have been climbing in emerging Asia as well. Malaysia and Pakistan have both embarked on tightening cycles while the Philippines is expected to hike by 50 basis points this year. Interest rates in China and India are also on the up, as Beijing limits credit expansion and Delhi can't stop spending.

You get my point: Just because U.S. rates are strengthening doesn't mean the dollar will necessarily follow suit.

In fact, rising U.S. rates and a weak dollar would be an ideal case for emerging Asia. U.S. stocks look expensive: Emerging Asia's 6.1 percent earnings yield is more alluring than the S&P 500's 4.5 percent. Plus the MSCI China Index is still 25 percent shy of its record 1993 high.

Mind the Gap

Can emerging Asia close the valuation discount? Since the 2013 taper tantrum, on an earnings basis, Asia has been "undervalued"

Source: Bloomberg

Don't think I'm blindly bullish. Last month, I warned of overly optimistic sell-side analysts and said China's big bank rally was progressing too fast. But unless we see a sustained stronger dollar, this selloff looks more like a blip.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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