Tuesday witnessed a significant downturn in Asian stock markets, highlighting the region's vulnerability amidst soaring interest rates and escalating geopolitical conflicts. This sharp decline has brought the MSCI Asia Pacific Index perilously close to negating its gains for the year 2024, with a drop of up to 2.2% - the largest since the previous August. Meanwhile, the S&P 500 experienced a 1.2% reduction on Monday, though it remains 6.1% higher year-to-date.
Concerns are mounting among traders that the combination of sustained high borrowing costs, due to a robust US economy, and climbing oil prices could disproportionately impact Asia. This is compounded by the strength of the US dollar and the region's reliance on energy imports. Doubts regarding China's economic recovery, following a mixed set of data for the first quarter, have also tempered expectations for a rebound in Asian market earnings, which have lagged behind their counterparts in the US and Europe throughout 2023.
According to Manish Bhargava, a fund manager at Straits Investment Holdings in Singapore, Asia's import-dependent economies are especially at risk from a strengthening US dollar, a common consequence of Federal Reserve hawkishness. He pointed out that the region's stock market growth has been driven more by valuation increases rather than fundamental economic performance.
An analysis reveals that nearly all of the Asian stock gauge's progress over the past year is attributable to a 6.5% rise in valuations, with earnings estimates showing little to no change. This contrasts with the developed markets' MSCI World Index, which has seen over 6.5% growth in both valuations and earnings within the same timeframe.
While the Asian index is projected to report a 4.1% profit growth for the first quarter of 2024, marking the first increase in eight quarters, the future outlook remains uncertain. This is largely due to the Federal Reserve's indication of a slower pace in rate cuts, affecting the region's economic and market vulnerability, as noted by Tareck Horchani, head of prime brokerage dealing at Maybank Securities Pte.
Analysts from Morgan Stanley, including Chetan Ahya, suggest that the Fed's hesitation to lower rates may lead central banks in China, South Korea, Indonesia, the Philippines, and Taiwan to delay their own rate reductions. Additionally, China's economic recovery is still in question after recent data indicated a faster-than-expected expansion in the first quarter, yet with weakening momentum as seen in March's retail sales and industrial output figures.
