Fed Repricing Makes Asian Stocks More Vulnerable Than Others

(Bloomberg) - Asian stocks fell sharply Tuesday, underscoring concerns about the region's vulnerability amid rising interest rates and heightened geopolitical tensions.

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The MSCI Asia Pacific Index fell as much as 2.2%, its biggest drop since last August. The slide means the index is now less than 1% away from wiping out its 2024 gains, while the S&P 500 fell 1.2% on Monday, but is still up 6.1% this year.

Traders are concerned that high borrowing costs due to the U.S. economic recovery and rising oil prices will hurt Asia even more due to the pressure of a stronger U.S. dollar and the region's reliance on energy. Doubts about China's economic recovery persisted after the mixed first quarter data, which undermined hopes for a sustained improvement in Asia's earnings. 2023 saw Asian equities underperform US and European equities.

"Many import-dependent economies in Asia may be particularly vulnerable to a stronger dollar, which is often accompanied by a hawkish Fed," said Manish Bhargava, fund manager at Straits Investment Holdings in Singapore. A stronger dollar is often accompanied by a hawkish Fed. He added that valuation growth, rather than underlying economic strength, has been the main micro-dynamic for the region's stock markets.

Read more about US Dollar Rides High Among Asian Currencies, Fueled by Renminbi

According to data compiled by Bloomberg, the rise in Asian equity indices over the past 12 months has come almost entirely from a 6.5% expansion in valuations, while earnings expectations have remained virtually unchanged. In contrast, the MSCI World Index of developed markets has grown more than 6.5% in both directions over the same period.

The Asian index is estimated to have delivered 4.1% of year-on-year profit growth between January and March, the first expansion in eight quarters, but the outlook for the rest of 2024 is now in doubt as the Fed no longer appears to be in a hurry to cut rates.

Chetan Ahya led a group of Morgan Stanley economists who wrote in a report that the Fed's delay would cause central banks in China, Korea, Indonesia, the Philippines and Taiwan to put off cutting interest rates.

Meanwhile, the outlook for China's economic recovery is far from clear, with data showing that although the economy grew faster than expected in the first quarter, disappointing retail sales and industrial output in March suggest that the momentum of China's economic recovery has begun to weaken.

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