Given the close association between movements in foreign exchange and equities, a measure of Asian currencies has fallen to its lowest level in more than two years. The persistent ascent of the dollar threatens to lead to further withdrawals from Asian emerging market stocks, dashing prospects for a second-half recovery for the area.
Given the close association between movements in foreign exchange and equities, a measure of Asian currencies has fallen to its lowest level in more than two years. The MSCI Asia ex-Japan Index has dropped 20% as foreign investors have already pulled $71 billion out of emerging Asian stock markets outside of China this year, more than doubling their outflows from 2021. Recently, the dollar has dominated the world’s currency markets thanks to wagers on rapid Federal Reserve interest rate hikes. A stronger dollar is bad news for Asian stocks as it denotes a reduction in risk-taking.
Vulnerable Spots
Higher global bond yields and recessionary headwinds are affecting valuations and the prospects for demand, making Asia’s tech-heavy markets like South Korea and Taiwan particularly susceptible. Foreigners have net sold $50 billion worth of their shares in the two countries, whose stock indices have been among the poorest performers in the region this year. Weaker local currencies hurt national balance sheets and business profit margins in economies less dependent on exports because both corporate and sovereign borrowers pay more interest on loans denominated in dollars. The rupee has fallen to a historic low in India, one of the world’s largest oil importers, as the country faces growing current-account and fiscal deficits. The baht, one of the major decliners in EM currencies this year, has fallen as a result of Thailand’s monetary authority’s lack of intervention.
The resilience of their stock markets that was demonstrated in 2022 may be threatened by further currency weakening. Chinese stocks, which in June had a tonne of positive comments, have sharply declined this month, contributing to Asia’s problems. A significant indicator of Hong Kong-listed equities is down more than 9% as a result of resurgent Covid fears, a worsening real estate crisis, and additional regulatory scrutiny of the tech industry. Given their sensitivity to interest rates, he continued, Asia’s infrastructure, home building, and construction equities will be more affected by a rising dollar. With a 6 percent decline so far this year, the Bloomberg JPMorgan Asia Dollar Index is on pace to post its worst yearly loss since the 1997 financial crisis in the area.
Sector Bets
The Asia ex-Japan index’s 10 sectors are all down this year. According to a study conducted by BNP Paribas Securities analysts last year, Taiwanese telecoms and consumer staples stocks, Indian IT companies, and Korean healthcare names, and over the past ten years, at similar times of declining Asian currencies, Malaysian energy companies regularly outperformed.
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