Investors warned of ebbing inflows for Asian markets
Although the fundamentals of Asian equities remain resilient, expectations that monetary stimulus measures from central banks around the world will end may reduce liquidity in emerging markets, says Credit Suisse.
Asian equity markets received largescale foreign inflows during this year’s first half of around US$30 billion on the back of stronger growth recovery and attractive valuations, while lower bond yields induced fund managers to chase growth opportunities in Asian equities, said John Woods, chief i nvestment officer for Asia-Pacific at Credit Suisse.
However, fund flows moderated in the third quarter with $4.6 billion worth of outflows detected as geopolitical risks made investors nervous and encouraged profit-taking, he said.
On the other hand, major central banks in developed economies appear unfazed by the recent downward surprise in global inflation dynamics and have signalled their intentions to continue with interest rate normalisation in an environment of positive economic growth in this year’s second half, said Mr Woods.
“As such, we do not expect large-scale inflows in emerging market equities over the next few months, and are neutral on Thai equities and the baht, with a negative view on local bonds,” he said.
“Thai equities have underperformed emerging markets and Asian equities, and the valuation remains unattractive relative to its historical average.”
Normalisation of global monetary policies and geopolitical risks will weigh on Asian currencies, equities, and bonds in the near term, said Mr Woods.
Investors should maintain a defensive stance in Asian equities, bonds and currencies despite the healthy economic backdrop.
“In our Asian equity strategy, we remain positive on Malaysia and negative on India and Indonesia. In currencies, we believe that high-beta currencies such as the Korean won and the Indonesian rupiah would feel the largest negative impact if the US dollar begins to strengthen on the back of a potential tapering announcement from the US Federal Reserve,” said Mr Woods. For asset allocation, Credit Suisse remains neutral on global equities and fixed-income securities.
Equities are likely to move sideways from here in light of macroeconomic momentum slowly rolling over and the Fed looking likely to further tighten its interest rate, he said. For fixed income, Credit Suisse is most positive on investment-grade corporate and financial credits, which offer the best risk-reward, but it keeps a neutral view on high-yield issuers given tight valuations.
“We also prefer alternative investments, specifically hedge funds and commodities, which benefit from robust growth and comparably low volatility,” said Mr Woods.