BENGALURU: Foreign investors dumped Asian equities in the first six days of August after two months of buying, as the United States ramped up pressure on China with a US$300 billion (RM1.26 trillion) trade barrage last week.
Overseas investors sold about US$4.5 billion of regional equities during the period, data from stock exchanges in South Korea, Taiwan, India, Thailand, Philippines, Indonesia, and Vietnam showed.
Sharp outflows from Asian markets point to increased worries that trade tensions between the world’s two top economies could escalate, and regional economies and corporate earnings might deteriorate further.
US President Donald Trump said last Thursday he would slap a 10% tariff on the re-maining US$300 billion of Chinese imports starting Sept 1, marking an end to a truce in the year-long trade war that was struck in June.
In response, China let its currency weaken 1.4% on Monday, sending it past the key 7-per-dollar level for the first time in more than a decade, and then the United States labelled Beijing a currency manipulator.
MSCI Asia-ex-Japan index had fallen 6.4% this month as of Tuesday’s close, after shedding 1.7% in July.
“Recent foreign outflows from Asian equities clearly suggest that investors are getting nervous on markets given escalating trade tensions,” said Chetan Seth, a strategist for Nomura Securities in Singapore.
It might get harder for the US and China to ease or soften these tensions given how events have unfolded over the last few days, he said.
Goldman Sachs said markets were pricing in a less than 15% chance of a trade deal being agreed. It estimated 13% and 8% cumulative earnings downside for MSCI China and MSCI Asia-ex-Japan in 2019-2020 under a “no deal” scenario.
Taiwan and India saw the biggest outflows in Asia, with net selling of US$1.8 billion and US$1.1 billion respectively. South Korea also witnessed out-flows, of US$919 million.
Taiwan and South Korean companies are more exposed to the Sino-US trade tussle as they have extensive ties with tech firms in China and are part of their supply chains.
Indian shares were undermined last month after the federal budget raised import tariffs on many items, increased taxes on the rich and proposed changes in shareholding norms.
A slew of disappointing earnings by Asian firms for the second quarter also increased investor caution on regional markets.
“So far 1H earnings in Asia-ex-Japan markets have been below estimates – although it’s still early days. The question investors need to answer is what happens to 2020 earnings as markets in 2H will start discounting next year’s earnings,” said Seth. “If trade tensions persist, there may be more downside to current con-sensus earnings estimates.”
In July, foreigners invested US$234 million in Asia, much less than US$4.2 billion inflows in June.
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KUALA LUMPUR: The Malaysian equity market is seeing more expensive valuations and slower earnings growth compared with its regional peers, according to HSBC Private Banking managing director and chief market strategist for Asia, Fan Cheuk Wan.
“Within our Asia equity portfolio, we’re still cautious on the Malaysian equity market mainly because of its expensive valuations versus the other cheaper regional peers. The earnings growth forecast for the Malaysian equity market still remains at single-digit, lagging behind other higher growth equity markets that we favour, such as China.
“For Malaysia, we forecast single-digit earnings growth but with the valuation premiums versus the regional’s average, it would cap the upside potential of the Malaysian equity market,” she told a press conference on the HSBC Private Banking 2019 2H Investment Outlook in Asia today.
Reflecting on Asian equities, it maintains a mild overweight position on China and Singapore. Fan said Singapore is the cheapest market in Asean and it has the lowest price-to-earnings and the highest dividend yield.
“Based on our year-end forecast, we still expect the FBM KLCI to come in at 1,740 points this year, some modest upside potential because the economy still remains resilient and there will be modest earnings growth for this year. In terms of the upside potential, there are cheaper markets that can deliver more upside,” elaborated Fan.
Nevertheless, HSBC Private Banking chief market strategist for Southeast Asia James Cheo still expects a 3-4% upside in the equity market.
“How we want to play it is to look at the domestic sectors. The consumption and infrastructure plays are where we think the opportunities are, and how it pans out could be end of this year or next year,” Cheo said.
On the ringgit, he said in the near term, there could be a risk-off where there will be more demand for the dollar given the uncertain environment.
“The domestic economy in Malaysia is still resilient so it reduces the downside for the ringgit. The ringgit could still be fairly resilient against the dollar,” said Cheo, adding that its year-end target for the ringgit is RM4.30 against the US dollar.
On Malaysia proposing a new currency based on gold, Cheo said it is an interesting idea but noted that there are trade-offs and that it should be thoroughly considered.
“It’s an international monetary system and just can’t be implemented on a single country. It requires a global consensus. Given how things are, it looks like things are more bilateral nowadays.
”We have been on a fiat currency model for many years and it has served us well. Our money supply has been growing significantly,” said Cheo.
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