Asian markets catch the cold

This article first appeared in The Edge Financial Daily, on February 6, 2018.
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KUALA LUMPUR: Most Asian markets succumbed to strong selling pressure yesterday, except for China, as US markets sneezed.

Growing concerns that the long overdue correction in the US equity markets might have finally arrived after the sharp fall on Wall Street last Friday spooked investors in Asia to take some money off the table. The heavy selldown in the US was mainly caused by renewed expectations of a more aggressive interest rate hike there as the US wage growth accelerated at its quickest pace since mid-2009, which is expected to fuel inflation.

The selling spread to the European markets, while the Dow Jones Industrial Average futures slid 300 points as at press time.

Nonetheless, local fund managers and analysts are optimistic that the pullback on Bursa Malaysia would be temporary as the selling was well absorbed and the global economic outlook remains positive.

Tokyo was the worst-hit market. The Nikkei 225 plunged 592.45 points or 2.55% to 22,682.08 points — the biggest losses since the US election. Hong Kong’s Hang Seng Index shed 356.56 points or 1.09% to 32,245.22 points, while South Korea’s Kospi fell by 33.64 points or 1.33% to 2,491.75 points.

On the local front, the FBM KLCI fell by 17.41 points or 0.93% to close at 1,853.07 points after it hit an intraday low of 1,842.06 points. It was the sharpest one-day fall since November 2016 when it fell by more than 100 basis points on a single trading day.

The selling was across the board. 966 decliners outnumbered 167 gainers, while 290 counters traded unchanged.

However, China’s markets bucked the trend. The Shanghai Composite Index added 25.42 points, or 0.73%, to close at 3,487.5 points, while the CSI 300 Index was up 2.91 points to 4,274.15 points.

“We think the biggest concern for global equities is that they had run too far, too fast in the past six months,” said UOB Asset Management (M) Bhd (UOB AM) chief executive officer Lim Suet Ling.

“The US equity market has corrected 4% from its highs, but this is not particularly large in the course of a bull market. In the bull markets from 2003 to 2007, the S&P 500 had seven corrections of 5% or more, but within a few months, the markets had surged to new highs.

“In Asia, where the bull market from 2003 to 2007 was even stronger, the equity market had three corrections over 17% in the course of that strong bull market,” Lim told The Edge Financial Daily via an email exchange.

She acknowledged that if the volatility in the stock market persists, a US-led correction could affect global markets, including Asia, as well.

As of the time of writing, the Chicago Board Options Exchange (CBOE) Volatility Index was at 18.07 points, its highest level since November 2016. It was also an increase of 4.61 points from 13.47 two days ago. The Volatility Index is better known as Wall Street’s “Fear Index”.

“Historically, corrections have hit Asia more than developed markets. Within Asia, Malaysia tends to be more stable during temporary sell-offs, but nevertheless, still suffers some downsides,” Lim noted.

The director of equity strategies and advisory at Affin Hwang Asset Management, Gan Eng Peng, anticipates that the correction on Bursa would be short-lived.

“Stronger-than-expected growth is making the US market reprice itself. This is driven by [a] rapid rise in US Treasuries, which have hit a four-year high of 2.84%. Given how strong markets have been recently, the pullback is not surprising.

“Also, given the pace of the US Treasuries’ movement, the key level to watch would be the 3% level, beyond which would wreak havoc with asset prices,” Gan said.

Kenanga Investment Bank Bhd head of research Chan Ken Yew concurred that the pullback seen on Bursa is a short-term correction, especially given that the FBM KLCI has managed to stay above the 1,840 level.

“If the index could hold above the 1,840 level, we should see a short-term correction. Earlier in the morning, it tested the 1,840 level but the market seemed to hold well above that level,” Chan said.

UOB AM’s Lim agreed that the correction should be short-lived and she suspected that it is likely that buying support will step in fairly quickly.

“The fundamentals are strong enough and there are many investors who have not shifted from fixed income to equities yet in this cycle.

Lim’s view is that the global expansion has at least another year left in it and probably more than that.

“Global investments tend to continue to perform until there are clearer signs that the global expansion is nearing an end. We thus recommend using any near-term correction as an opportunity to make sure you are overweighted in equities as may best suit one’s individual portfolio during a bull market,” Lim said.