Inner Strength

Goldman Is Warning of More Pain Ahead. Don't Listen

Emerging Asia is more resilient than you might think.
Photographer: WONGSAPHAT SUKNACHON/Getty Images

Whenever there's a sharp global sell-off sparked by U.S. equities, Goldman Sachs Group Inc. comes out warning of more volatility and pain ahead.

In July, when there was a brief dip and the Cboe Volatility Index jumped, the venerable investment bank said selling from risk-parity funds, which buy government bonds to hedge against stock portfolios, could lead to more offloading of shares. The S&P 500 has managed to hum along since.

On Monday, when the Dow suffered its worst intraday points plunge in history in late afternoon trading, Goldman pointed its finger at selling by managed-futures funds, or long-short strategy funds aimed at capturing market trends. If the rout continues, there could be further unwinding from these portfolios to the tune of about $190 billion globally, Goldman said.

Asia was a sea of red on Tuesday. In January, emerging markets saw close to $14 billion of fund inflows, so some unwinding is happening. Markets in Vietnam are down more than 10 percent this week, after a 53 percent gain in 2017. Foreigners pumped a record $1 billion into the Southeast Asian frontier market last year.

Pain Management

Vietnam, Asia's best performer in 2017, has taken the biggest blow in the latest rout

Source: Bloomberg

But as an emerging Asia bull, I have to say a few things.

Let's not forget Goldman makes money when markets are volatile. Lloyd Blankfein must be rubbing his hands with glee now the VIX is approaching 2015 flash crash levels.

Fear It

The VIX more than doubled on Monday and is approaching highs last seen in 2015

Source: Bloomberg

And second, emerging Asia, and China in particular, offers more protection against the rise of the machines. On Monday, bargain hunters from the mainland bought a record $1.6 billion of Hong Kong stocks through exchange links with Shanghai and Shenzhen, an option that wasn't available a few years ago. As I argued, so long as the U.S. dollar remains weak, the city's shares will remain a fertile hunting ground.

In November, China vowed to curb risks in the country's $15 trillion asset-management industry by asking funds to morph into staid mutual portfolios. The new measures saw an increase in long-only mutual funds, and in flows to Hong Kong stocks viewed as cheaper and safer, especially from investors burned by growth plays in Shenzhen. That mainland money is continuing to flow, with net buying of more than HK$5 billion ($640 million) as of the noon break Tuesday. Without that support, the Hang Seng Index would look a lot worse.

Red Army to the Rescue

Mainland Chinese investors are flooding into Hong Kong through the Shanghai and Shenzhen stock connects, an option that wasn't available during 2013's taper tantrum

Source: Bloomberg

According to a Hong Kong Exchanges & Clearing Ltd. survey, Chinese investors accounted for 9 percent of total market turnover in July, putting them on equal footing with U.K. and U.S. investors. That presence can only be stronger now.

It's also important to remember that emerging Asia never quite recovered from the 2013 capital flight sparked by fears of a U.S. interest rate rise. Some markets, including China, Thailand and Malaysia, are still a way from their peak.

Further to Run

In dollar terms, many Asian markets aren't at their historical peak

Source: Bloomberg

Note: Data compare the one-year high of the MSCI local-country index to that benchmark's record.

The MSCI Asia ex-Japan Index's 7.5 percent jump in January may have been too good to be true, but bears like Goldman should focus their attention on the U.S. Stock and bond valuations there look a lot more stretched.

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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