Asian equity markets have been world-beaters so far this year as global investors unwind record positions in the US dollar and pump the proceeds into cheaper, higher-yielding assets throughout the region.
The MSCI Emerging Markets Asia Index surged 14.3% this year through March 29, outpacing a 6% gain in MSCI World. The corresponding benchmarks for China, India, Korea, Singapore and Taiwan all notched double-digit gains. Meanwhile, the US was up 5.6% during that span after a post-election rally dating back to November fizzled out in March. The Dow Jones Industrial Average declined in eight straight sessions during the month for its longest losing streak in nearly six years.
“Coming into the year a lot of funds were too long cash,” said Martin Marnick, director at Motilal Oswal (HK). “A lot of funds are now just trying to put the money somewhere and reallocate where they can and Asia is getting a lot of that outflow.”
An eight-year bull market run in the US has forged fresh highs in its currency and stock markets. The pendulum has started to swing back to emerging markets though for the first time in years as investors look to get better bang for their buck and diversify their portfolios in case of a sudden US downturn. With many Asian equity markets still trading near their pre-Global Financial Crisis levels, renewed buying interest could finally put them over the hump.
US-based funds that buy international stocks raised US$5.1 billion in the week ended March 22 versus a US$6.9 billion sell-off in funds focused on the domestic market, according to Investment Company Institute data. The international funds have attracted more than US$40 billion so far this year, the most since 2015.
Investors had been taking advantage of low interest rates in Asian countries like Japan and Taiwan to borrow money cheaply and use it to buy US-dollar denominated assets. This pumped waves of liquidity into US capital markets and helped lift the benchmark S&P 500 Index to a record high in March.
But the tides are turning. The Bank of America Merrill Lynch fund manager survey for March showed long US dollar is considered the most crowded trade in the market today and that one in three investors believe the currency is overvalued. The US Dollar Index, which measures the greenback against a basket of other currencies, was down 3.7% to 100 from a 14-year intraday high recorded in January.
Driving the outflow to global markets is a growing concern that US stock prices have become too expensive. Bank of America’s survey showed that a net 81% of investors believe the US is the most overvalued region in the world.
Asian markets provide value-seekers with an attractive landing spot. While the MSCI USA Index traded at 18 times forward earnings through February, the corresponding benchmarks for China, Korea and Singapore all traded below 14 times earnings. Meanwhile, Hong Kong traded at 15.7 times and Malaysia at 16 times.
A surge in recent trading activity throughout the region suggests that investors are eager to capitalize on the relatively cheaper share prices. Main board turnover in Hong Kong breached the HK$100 billion mark again in March, tallying HK$121.3 billion on March 17, up from a daily average of HK$81.2 billion in February. In Malaysia, total turnover on Bursa Malaysia topped 64.8 billion ringgit in the month through March 29, climbing from 45.6 billion ringgit in February and 38.6 billion ringgit in January.
For now, the risk-reward ratio still seems to favor Asian markets
High-yielding REITS and property stocks have attracted interest in Singapore. Institutional investors bought a net S$34.3 million in the sector in February, reversing five straight monthly sell-offs. In expectation of further demand, Nikko Asset Management together with Straits Trading launched an Asia ex-Japan REIT ETF on the Singapore Exchange that began trading on March 29 with more than S$50 million in assets under management.
The rally in Asia picked up steam after the US Federal Reserve signaled a cautious, wait-and-see approach to monetary tightening in March and raised interest rates for just the third time in nearly a decade. A more aggressive monetary policy could have enticed investors to pour money back into dollar-denominated assets in expectation that higher interest rates would translate to better yields. For now, though, the risk-reward ratio still seems to favor Asian markets.
“It is all but an open invitation to buy emerging markets,” said Stephen Innes, senior trader at OANDA. “The Fed has green-lighted risk for the foreseeable future.”