Brexit Shock May Have Silver Lining for Bruised Asian Investorsby , , and
Asian stocks trade at lower valuations after underperformance
Odds of Fed raising rates by year-end slumps to 15 percent
Asia’s equity markets were the first to suffer through a Brexit-fueled rout. Old Mutual Plc and Citi Private Bank are betting they may be the first to recover.
As Britain’s shock decision to leave the European Union saw asset managers desert stocks across the world, RS Investment Management says declines have left equities in Greater China looking more attractive. Shares in Shanghai are insulated from global sentiment because local investors dominate trading, while the turmoil may delay an increase in U.S. interest rates, making higher-yielding Asian securities more appealing. More than $2.5 trillion was wiped off equities around the world on Friday, with $582 billion of those losses coming in Asia, data compiled by Bloomberg show.
“It is very much a European issue," said Joshua Crabb, Hong Kong-based head of Asian equities at a unit of Old Mutual. “For us in Asia it’s opportunity to look around for things you want to buy."
The region has value on its side. The MSCI Asia Pacific Index trades near the cheapest levels versus global peers in at least 15 years as concern about China’s economic slowdown and the U.S. interest-rate outlook made the gauge a serial underperformer. The Asian measure fell 5.3 percent in the five years through June 24, compared with an advance of 22 percent by Europe’s benchmark index and a rally of 61 percent by the S&P 500 Index.
The victory of the “Leave” campaign stunned many investors who’d put wagers on riskier assets over the past week as bookmakers’ odds suggested the chance of a so-called Brexit was less than one in four. MSCI’s Asian measure dropped 3.7 percent on Friday, led by losses in Japan, South Korea, Australia and Hong Kong. A gauge of Asian currencies weakened the most since China devalued the yuan in August.
“This is just a knee-jerk reaction,” said Tony Chu, a Hong Kong-based money manager at RS Investment Management, which oversees about $17 billion. “Most stocks we look at in Greater China have little to do with the U.K. or the European economies. We still like Internet-related stocks, consumption and health-care stocks. That’s where we see relatively better earnings prospects.”
The Shanghai Composite Index slid 1.3 percent on Friday, while volume increased less than other major Asian benchmark gauges. Foreign investors are limited by quotas from buying and selling mainland Chinese equities, with local individuals accounting for about 80 percent of trading.
Most Asian markets advanced on Monday. The Topix index rebounded 1.8 percent at the close, as the Shanghai gauge climbed 1.5 percent. Australia’s S&P/ASX 200 Index added 0.5 percent. Hong Kong’s Hang Seng Index dropped 0.2 percent, trimming an earlier loss of 1.4 percent.
To be sure, in the short term, fund managers are girding for higher volatility and a flight out of all but the safest assets. Asia can’t escape a global deterioration in risk sentiment, Harvest Global Investments Ltd. says.
“In the medium term there’ll be some benefits to Asia because the uncertainty in Europe will rise, but the problem is in the short term correlation between global markets will be very high," said Thomas Kwan, Hong Kong-based chief investment officer at Harvest Global Investments. "When they de-risk, they’ll de-risk together."
Plus, some of the region’s biggest stock markets are vulnerable to concern about the outlook for the U.K. and Europe, as well as the rush into haven assets. The Topix plunged 7.3 percent on Friday as the yen soared, and London-based HSBC Holdings Plc sank 6.6 percent to be the biggest drag on Hong Kong’s Hang Seng Index. A slumping euro would hurt earnings for Asia’s exporters, while Royal Bank of Scotland Group Plc said the rally in the dollar may make it harder for China to keep a lid on capital outflows.
Speculation the Federal Reserve will wait longer to raise interest rates is a boon to Asia’s emerging and frontier markets, the region’s best performers in 2016. Among seven such markets tracked by Bloomberg, six saw inflows from foreign investors this year. The chance of the U.S. central bank increasing borrowing costs by year-end slumped to 15 percent on Friday, from 50-50 before the Brexit result, Fed fund futures show.
“When the panic settles down, I think two conclusions can be made: the Fed will not raise rates, that will be delayed much longer, and the U.S. dollar will weaken after the panic because of the Fed," said Ken Peng, an Asian investment strategist at Citi Private Bank in Hong Kong. “These two are together are generally positive for emerging markets."
Acting as bulwarks against Brexit-fueled turbulence are optimism about Pakistan’s potential entry into MSCI Inc.’s developing nation gauge, Rodrigo Duterte’s pledge to spur Philippine growth, and Thailand’s infrastructure largess. Stock indexes in Karachi, Manila and Bangkok led regional gains in 2016, rallying at least 9.7 percent through Friday, compared with the MSCI Emerging Markets Index’s 1.5 percent advance.
“The direct economic implications for emerging Asia of the U.K.’s vote to leave the EU should be small," Capital Economics Ltd. said in an e-mailed statement on Friday, noting that exports to Britain make up just 0.7 percent of the region’s gross domestic product. “Most emerging Asian economies are well placed to survive even a prolonged period of financial stress."