Best Asia market rally since 2009 to cool once reality sets in

Manila – A world-beating rally across Asian markets is starting to look precarious as some analysts caution that China reopening euphoria will give way to the sober reality of a looming global recession. 

Stocks are headed for their best month since 2009 and currencies have advanced the most in years, as bets for a softer Federal Reserve tightening and

China’s pivot away from Covid-19-zero

sparked a buying frenzy.

However, the stunning reversal has been built on tentative optimism rather than firm ground – and in part driven by the short-covering of bearish bets. This means the gains may cool unless the Fed lives up to hopes of a smaller interest rate hike and the Chinese authorities continue to relax virus restrictions in the face of a spike in infections. All Asian currencies were weaker against the US dollar on Thursday, while most stock gauges were in the red. 

“The recent moves are so outsized and these expose investors to some correction,” said Ms Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. “When global growth is set to weaken, it is difficult to see currencies continue to rally if Asia’s export powerhouses are under pressure.” 

The MSCI Asia-Pacific Index has jumped more than 12 per cent in November, easily beating peers in the United States and Europe. Some of the largest gains came from Hong Kong, where a gauge of Chinese shares trading in the city entered a technical bull market earlier this week.  

An index of Asian currencies versus the US dollar has jumped about 3 per cent so far in November, poised for its steepest monthly advance since at least 2016. The relative strength indexes of the Thai baht and Taiwan’s dollar have breached levels that suggest the currencies have been overbought.

After suffering heavy losses for most of the year, investors appear keen to jump in lest they may miss out on a rally. While markets retreated on Wednesday, the pullback was modest, with the MSCI Asia gauge falling less than 1 per cent. 

But once the excitement subsides, more scrutiny will be given to every piecemeal change in the Fed’s signals and China’s pandemic policy shifts, putting markets at risk of greater volatility. 

“It does not appear to us... this is the beginning of a sustained rally as there is still some uncertainty on the path of the United States’ inflation and the Fed’s hiking cycle,” said Mr Chetan Seth, Asia-Pacific equity strategist for Nomura Holdings. “The reality is that we have not yet seen a full reopening in China and we do not know when and how that happens.” 

Economists surveyed by Bloomberg see US inflation running hotter next year than they did a month ago, and recession odds continue to mount against a backdrop of rising borrowing costs. Meanwhile, despite the latest loosening, China is expected to adhere to its policy of rooting out the virus until next year. 

For sure, after months of underperformance, Asian assets are primed for a rebound and the growth potential for its developing economies remains large. Over the medium term, some money managers predict more gains.

“The rally was so fast that I would expect some pullbacks, but more dovish Fed talk and policy actions in China do argue for a further rally,” said Mr Rajeev De Mello, a global macro portfolio manager at Gama Asset Management. 

Asian emerging market equities outside China drew almost US$10 billion (S$13.7 billion) of inflows from global funds in November, the biggest since 2020. But the road ahead will be bumpy as traders navigate the risk of a US recession and potential policy whiplashes in China. 

For Mr Frank Benzimra, head of Asia equity strategy at Societe Generale, next year will not be a repeat of 2022.

Asian central banks would have to pivot before the Fed and valuations are low, but “the Fed is not done hiking, and US financial conditions, while easing, are still tight”, he said. Bloomberg