What Analysts Say Is Next for Asian Markets After Fed Decision

(Bloomberg) -- The less-hawkish-than-feared Federal Reserve policy decision will give risk assets in Asia a bounce, though investors should retain a defensive stance due to the threat of further policy tightening and capital outflows, according to strategists.

Analysts also warned investors not to expect an inflection point for the dollar as any pullback in the US currency is likely to be more of a pause. They reaffirmed their view that Chinese assets are less exposed to US rate hikes, whereas Indian and Southeast Asian are more vulnerable.

US policy makers raised their key interest rate by another 75 basis points on Wednesday and said they anticipate “ongoing increases” but stopped short of giving specific guidance of how far tightening will go. US stocks rallied after the announcement and the dollar weakened.

“It is too early to signal an all clear,” said Marvin Loh, a senior macro strategist at State Street Global Markets in Boston. “Expect that volatility will return, possibly in the fall, when inflation comparables would expect a rapid decline in prices.”

Here are some comments on what’s next for Asian markets:

Staying Defensive

“Within Asia, we are still in defensive mode, partly on policy tightening, but also a negative capital flows backdrop,” said Dwyfor Evans, head of Asia Pacific macro strategy at State Street Global Markets in Hong Kong. “For equities, we have growth concerns on Korea, one to avoid, and we favor Taiwan on strong earnings, but we hedge out the TWD currency exposure and remain biased toward long USD versus Asia.”

“For the next six months I would certainly agree that need to be a bit defensive asset classes across Asia,” said Hartmut Issel, head of Asia Pacific equities and credit at UBS Wealth Management in Singapore. “The region will probably follow mostly what the US does also in terms of more tightening.”

Credit Check

“Risk assets, including Asian credit, could benefit as the fixed-income markets may gain favor again,” said Thu Ha Chow, head of Asia fixed income at Robeco Singapore. “With the recent spread widening in the Asian credit market, we see value in some of the Indian high-yield issuers in the renewable energy, steel, and telecom sectors. We view these sectors as more resilient to an economic downturn but also have the capacity to pass on price increases. We continue to be cautious on sovereign issuers, particularly in the frontier space.”

ASEAN Recovery

“The fact that investors could start to see the end of the hiking cycle could prompt some optimism,” said Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management in Hong Kong. “This was reflected by growth stocks outperforming value stocks overnight. Bond yields have also declined with curve flattened. We expect this would also be positive for Asian assets in general given the potential improvement in risk appetite in the short term. We remain optimistic on the domestic recovery story in Asia, especially in Asean.”

China Story

“China is less vulnerable to US rate hikes,” said Jian Shi Cortesi, investment director at GAM Investment Management in Zurich. “For China, we see domestic policies as a much more important driving force than the US rates. India is vulnerable to higher US interest rates, which could lead to capital outflow, depress the Indian rupee further, prolong imported inflation and prompt more domestic rate hikes. Southeast Asian markets tend to underperform in the rate-hike cycles.”

Comfortable Yen

“As for USD/JPY, we think the pair is finding a comfort zone between 135-140,” said TD Securities strategists including Oscar Munoz and Priya Misra. “It remains sensitive to Fed terminal rate pricing but the jury is still out on where that might finally land. We do not think that there is significant downside risk yet given the rate differential backdrop remains strongly in the USD’s favor. For the dollar, we think it is appropriate to adopt a neutral stance for now. For the dollar, we think it is appropriate to adopt a neutral stance for now. We think this is more of a dollar on pause than an inflection point however.”

Korea Rebound

“There would be a slight improvement in investor sentiment and any rebound will not be sustainable in the long term,” said Heo Pil-Seok, chief executive at Midas International Asset Management in Seoul. “It’ll be a short rebound at best because second-quarter corporate earnings results were not great and third-quarter could even be worse with macroeconomic data set to deteriorate further.”

Aussie and Kiwi

“Aussie is still seen in a range near term, risk assets still need to navigate a tricky landscape of more Fed hikes and a slowing global economy with geopolitical tensions not going away either,” said Rodrigo Catril, a strategist at National Australia Bank in Sydney. “We still like AUD outperforming against the crosses though targeting 1.13 for AUD/NZD, 0.69 for AUD/EUR and 0.59 for AUD/GBP”

“The shift in stance implied by Powell -- slower rate hikes -- will weigh on the dollar near term, and lift NZD/USD further to beyond 0.6300,” said Imre Speizer, strategist at Westpac in Auckland. “But over the next month or two, there remain many global risks (e.g. China, Ukraine/Russia/European energy, Italy) which should limit the dollar’s fall, so not getting too carried away by the recent kiwi rise.”

EMFX Risk

“A strong dollar and higher rates in the US tend to cause EM currencies to depreciate,” said Nancy Davis, founder and portfolio manager at Quadratic Capital Management. “That could be negative for Asian countries with high USD denominated debt. It could favor countries that have strong exports as those will tend to be more competitive.”

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