HONG KONG/SINGAPORE (BLOOMBERG) - Asia's stock 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 US interest rates, making higher-yielding Asian securities more appealing.
More than US$2.5 trillion was wiped offequities around the world on Friday, with US$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 US interest-rate outlook made the gauge a serial underperformer. The Asian measure fell 5.3 per cent in the five years through June 24, compared with an advance of 22 per cent by Europe's benchmark index and a rally of 61 per cent 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 per cent 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 US$17 billion. "Most stocks we look at in Greater China have little to do with the UK 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 per cent 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.
Asian markets were mixed on Monday. The Topix index rebounded 0.9 per cent at the lunch break, as the Shanghai gauge climbed 0.7 per cent. Australia's S&P/ASX 200 Index added 0.2 per cent, while South Korea's Kospi index slipped 0.5 per cent and Hong Kong's Hang Seng Index was down 0.9 per cent.
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 UK and Europe, as well as the rush into haven assets. The Topix plunged 7.3 per cent on Friday as the yen soared, and London-based HSBC Holdings sank 6.6 per cent 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 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 US central bank increasing borrowing costs by year-end slumped to 15 per cent 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 US 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.
"The direct economic implications for emerging Asia of the UK's vote to leave the EU should be small," Capital Economics said in an e-mailed statement on Friday, noting that exports to Britain make up just 0.7 per cent of the region's gross domestic product. "Most emerging Asian economies are well placed to survive even a prolonged period of financial stress."