HONG KONG (BLOOMBERG) - So much for starting off the new year on the right foot.
The benchmark gauge of Asia-Pacific stocks excluding Japan slumped 1.6 per cent as of 12:29pm in Hong Kong on Wednesday (Jan 2) as traders returned to work in key regions including Hong Kong, China, Taiwan and Korea. Japan markets are closed and reopen on Jan. 4.
Wednesday's plunge, which is the worst start to the year in three, has one culprit: China's factory conditions slumped in December. To be precise, the Caixin Media and IHS Markit PMI fell to 49.7 from 50.2, its lowest reading since May 2017.
"Asian markets took a deep dive into negative territory following another disappointing China Caixin manufacturing PMI reading," said Margaret Yang, market analyst at CMC Markets, in a note to clients. "China manufacturing PMIs is falling at a pace faster than economists' forecast, suggesting global economic slowdown and trade war is hurting the country's manufacturing activities."
That sent several key stock gauges across Asia down on Wednesday:
Hong Kong's Hang Seng Index tumbled 2.4 per cent, poised for its biggest drop in a month. The Shanghai-Shenzhen CSI 300 Index dropped 1.2 per cent, on track for its lowest close since March 2016.
Benchmarks in Taiwan and Korea declined at least 1.4 per cent to snap brief, two-day rallies.
Australia's S&P/ASX 200 lost as much as 1.3 per cent while Singapore's Straits Times Index was down 1.1 per cent.
US stock-index futures, which rallied before China data came through, erased those gains and fell as much as 1.1 per cent.
This isn't the first country to report deteriorating factory conditions across the region's export-heavy economies with supply chains more tightly interwoven than ever. Taiwan, Malaysia, Vietnam, the Philippines and South Korea were hit by the US-China trade war and a fading technology boom. Earlier on Wednesday, export-reliant Singapore's economic growth slowed to 2.2 per cent year-on-year growth in the fourth quarter and home prices fell for the first time in six quarters.
This year "is going to be a challenging year for everybody, not just China but also global," Yang said in an interview with Bloomberg TV. "We are probably off the peak of a cyclical upswing" with factory conditions slowing down not just in China, but in European countries as well, she said.
Cliff Tan, MUFG Bank's East Asia head of global markets research, suggests keeping your "powder pretty dry" until at least the end of the first quarter as investor "nervousness" is likely to continue. Jitters primarily reflect earnings revisions that haven't bottomed out yet, he added.
"With the Fed probably undecided itself on what it needs to do on the interest rate front I don't see how folks can be too sure about anything," Tan said.
FOCUS ON DEVELOPED MARKETS
While Asian stocks led market declines last year and appear to be picking up where they left off, it's developed markets that will be under the microscope in 2019, especially as Democrats take over the House in Congress, said Clive McDonnell, head of equity strategy at Standard Chartered Private Bank in Singapore.
"It's rather developed markets that are under a little more pressure, given the extent Asia markets declined last year," McDonnell said. This trend emerged in December when it was the US that drove the downside in markets, he said.
"It's a clear and present risk for markets that 2019 is a down year," he said. "It's not our central scenario but it's a very real risk."
STOMACH THE VOLATILITY
"The overly pessimistic view that investors have adopted is likely to bleed through into January," said Kerry Craig, Melbourne-based global market strategist at JPMorgan Asset Management. "Given that a weaker global growth outlook, and in my view misplaced recessionary fears, are the core of that view, until we see a stabilization or improvement in the economic data from the major economies, China, US and the Eurozone, markets may have a tough time."
Craig suggests that a balanced portfolio of stocks and bonds will likely deliver returns this year which could be an improvement compared with 2018.
"For investors who can look past the end of this cycle and through to the next, they may be willing to stomach the volatility, for the long-run return potential," he said.