Asia's stock benchmark enters bear market with no end in sight

  • Markets
  • Thursday, 25 Oct 2018

Asian stocks slumped to nine-month lows on Thursday as investors worried that the Trump administration's approach to trade is harming global economic growth.

SINGAPORE: After a slump in U.S. stocks, Asia’s main equity gauge has finally succumbed, entering a bear market overnight. And Thursday isn’t looking pretty. 

The MSCI Asia Pacific Index fell 1.3 percent at 8:39 a.m. in Hong Kong, taking its slide from a January peak to 21 percent. Japan’s Topix index plunged 2.5 percent, heading for its lowest close since September 2017, while the Kospi 100 Index’s 2.1 percent slide took it into bear-market territory after data showed South Korea’s economy grew less than projected in the third quarter. 

This comes after tech-heavy Nasdaq Composite Index plunged 4.4 percent for its biggest single-day slide since August 2011 and entered a correction. Both the Dow Jones Industrial Average and S&P 500 Index erased their annual gains, even as the S&P 500 operating income is surging more than twice the historical average.

The reasons for the slump in Asia are well known: there’s the U.S.-China trade war, worries about slowing economic and earnings growth, tech shares plunging and rising rates amid Federal Reserve tightening. But this week, the biggest point of concern for investors including UOB Kay Hian (Hong Kong) Ltd.’s Steven Leung has been the U.S. dollar, which hit a new high Wednesday.

“The U.S. dollar has been strengthening this year and the pace has accelerated,” said Leung, executive director at UOB in Hong Kong. “Money may continue to go back to the U.S. and make the emerging-markets outflow worse for the rest of this year.”

The strengthening greenback has led to massive foreign outflows from Asian equity funds and has forced local central banks to raise interest rates in order to protect their plunging currencies. That, in turn, has created more pressure on local stock markets, Leung said. He expects equity swings to continue in the region.

The Federal Reserve’s hawkish remarks earlier this month and Chinese stocks falling to a sensitive level -- the Shanghai Composite Index moved more than 2 percent for four straight days before fluctuating intraday on Wednesday -- are only adding to the pressure, said Armand Yeung, the managing director of Central Asset Investments in Hong Kong. 

“Could Asian markets really withstand four rate hikes in U.S. next year? People should really think about that,” said Yeung. “Most people -- like us -- are very cautious nowadays and have been reducing their equity exposure, or just focusing on defensive stocks or buying some bonds.”

With a more than 10 percent plunge in October, the MSCI Asia Pacific Index is heading for its biggest monthly decline since October 2008. It’s fallen more than the S&P 500 and the Stoxx 600, and five of the world’s worst-performing equity markets are from Asia this year. If the weakness continues in tech shares -- they account for a fifth of the regional benchmark index and are the biggest declining group in 2018 -- investors may just have to brace for more turbulence ahead.

“We still do not know the full outcome of this trade war as the U.S. and China act and react with rhetoric,” said Jim McCafferty, the head of equity research for Asia ex-Japan at Nomura Holdings Inc. “U.S. tech names are also highly volatile, so it is inevitable that this volatility will spread to the supply chain in Asia.” - Bloomberg

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