This doesn’t come as a surprise considering the backdrop, but it’s worth mentioning, if for no other reason than it makes for a good headline: The MSCI Asia Pacific Index fell for a tenth consecutive session on Wednesday. That’s the longest losing streak in some 16 years.
Again, it’s not hard to identify the culprits.
For one thing, the Trump administration appears hell-bent on ratcheting up the trade tensions with China. Tariffs on an additional $200 billion in Chinese goods seem like a foregone conclusion at this point and late last week, the President said duties on another $267 billion in products are “ready to go”, an apparent allusion to the notion that if Beijing retaliates as promised (with differentiated levies on $60 billion in U.S. imports), the USTR will view that as an “unfair” escalation on China’s part (and yes, that’s an absurd way to look at things).
The worse the trade tensions, the higher the likelihood that China’s economy will decelerate at a faster pace than expected, persistent resilience and the deterrent effects of yuan depreciation not withstanding.
Meanwhile, persistent dollar strength continues to pressure vulnerable EM economies and currencies. The more pressure exerted by dollar strength, the more prone EM policymakers are to hiking rates to protect their currencies. Rate hikes have the potential to stifle domestic growth and weigh on local equities. Throw in the fact that the trade war could also lead to an economic slowdown outside of the U.S. and you’ve got something of a perfect storm. Some Asian economies are in the crosshairs. Indonesia, for example, is especially vulnerable.
In fact, some analysts believe Asia is the real “elephant in the room” when it comes to who’s most at risk from a receding tide of USD liquidity. Recall the following from Nedbank’s Neel Heyenke and Mehul Daya:
Forget about Turkey’s woes, Asia is the elephant in the room. South East Asia stands out again as in 1997/8, with a large amount of USD denominated debt outstanding. The only difference is then Asia had fixed exchange rates and now they are floating! We believe Asia will be the next source of downside systemic risk for financial markets.
Asia’s USD debt, relative to international FX reserves and exports, has risen significantly since 2009. This leaves these nations susceptible to a shortage in USDs. Notably, the Asian nations that have amassed record amounts of USD debt are also home to the largest technology companies i.e. Tencent (China), Alibab (China), TSNC (Taiwan), Samsung (S.Korea). The tech sector is now 28% of the MSCI EM index.
This week, Hong Kong’s Hang Seng fell into a bear market, joining onshore Chinese shares and EM equities as a group.
So is it time to go “bargain” hunting/falling knife catching? Well, that’s a decision investors will have to make for themselves. For what it’s worth, forward P/Es on the MSCI EM Asia index are just now below their 10-year average, so it might be a bit of a stretch to use the “bargain” characterization. If it’s a more granular look you’re after, here’s a table from Goldman that breaks everything down for you:
That’s current through September 7. Draw your own conclusions.