Delta epidemic darkens Asian stock markets
TOKYO – Asian stock markets significantly underperform the rest of the world in the third quarter, as global investors pull out of the region amid the worsening number of COVID-19 cases and new lockdowns.
Fund managers and strategists say the outlook for the rest of the year depends on the progress of vaccinations – but even then the region could struggle to attract capital flows as the US tightens their monetary policy to the detriment of other markets and that China pursues a regulatory crackdown on its largest companies.
Japan’s Nikkei Stock Average has fallen more than 6% since late June, hitting its lowest level this year last week. South Korea’s Kospi is down 7% and the Philippines’ PSE index is down almost 4%. The MSCI All Country Asia fell more than 8% after stronger sales in many markets last week.
The MSCI USA and MSCI Euro remain firmly in positive territory for more than half of the third quarter.
“COVID causes an outflow of investment money from Asia,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo. “This is especially true for Southeast Asia because of its low vaccination rates.”
As governments rush to vaccinate their populations, the immediate response to the rapid spread of the delta variant has been to put in place lockdowns or states of emergency, with potentially significant repercussions for economies.
Japan, which set a record for daily infections last week, extended the state of emergency covering Tokyo and five other regions until September while expanding the decree to seven more prefectures. This is the second expansion of the capital, which has been subject to emergency restrictions since July 12. As a result, Mizuho Securities increased its estimate of the economic impact to around 1,000 billion yen ($ 9.1 billion).
Meanwhile, China is experiencing its biggest resurgence of coronavirus cases since January. Beijing has classified more than a dozen areas as high-risk and restricted intercity travel while enforcing strict quarantine and mass testing whenever there is an outbreak. Retail sales and industrial production in July were lower than expected, prompting investor concerns not only about the Chinese economy, but also the outlook for related economies across the region.
Masamitsu Ohki, chief portfolio manager at Fivestar Asset Management in Tokyo, said his market outlook had changed compared to the start of the year. “The stock market has been overwhelmed by negative factors, including the resurgence of COVID and the Chinese crackdown. Since about June, there have been many risk factors, which made trading stressful.”
Investors are pulling out of the currency markets as well as stocks. On August 10, the Thai baht fell to its lowest level against the US dollar in more than three years. With the number of COVID-19 cases reported daily by the kingdom having quadrupled since the end of June, the outlook for tourism looks bleak, negatively affecting the country’s current account balance.
The government has extended lockdowns and a nighttime curfew until the end of this month, despite Prime Minister Prayuth Chan-ocha’s plan to reopen the country to foreign visitors vaccinated in October.
Macro hedge fund managers who had crammed into the country without hedging their currency risk, expecting to benefit from a double boost from rising stock prices and the appreciation of the baht, instead suffered a double blow from falling stock markets and depreciating currencies.
“The epidemics have shaken the strategy of these funds to double the reopening of tourism,” said a strategist of a Thai mutual fund.
The rush to liquidate positions has contributed to the fall in Thailand’s SET benchmark index by around 2% since the end of June.
Only about 8% of the Thai population has received two doses of a vaccine.
The South Korean won also weakened against the US dollar, falling to its lowest level in nearly a year. The Philippine peso has depreciated nearly 5% in the past two months. Manila has been on lockdown since the start of the month, and the government has extended the ban on travelers from 10 countries, including India, which has reduced its forecast for economic growth for 2021 to 4% to 5 % compared to the previous 6% to 7%. .
The vaccination rate in the Philippines is around 12%.
Most market strategists do not anticipate significant corrections in the stock markets. Rather, they suggest Asian stocks will enter a dull period as investors nervously track vaccination, infection and hospitalization rates – the same metrics governments use to decide when to ease lockdowns.
Considering how the delta variant affected even those who were fully vaccinated, “an important indicator today would be the rate of hospitalization,” said Frank Benzimra, Head of Asia Equity Strategy at Societe Generale in Hong Kong. “Asian markets are likely to continue to be sluggish and sideways.”
SMBC’s Hirayama noted that the current rise in infections in many Asian countries began around the same time the US Federal Reserve began to signal a move away from its ultra-loose monetary policy.
In June, the Fed said its officials expected the first post-pandemic interest rate hike in 2023, sooner than expected, and also began to consider cutting bond purchases. The prospect of a tightening of US monetary policy has propelled the dollar to its highest level of the year, exacerbating the flow of money from emerging economies to the United States and increasing the burden of dollar-denominated debt in Asia. .
“Concerns over US tapering, combined with COVID, have given investors a reason to reduce their exposure to risk in emerging Asian markets,”” Hirayama said.
The China and Hong Kong stock indexes have also been hit by what Jonathan Garner, Morgan Stanley’s chief strategist for Asia and Emerging Markets, called “the country’s regulatory reset.”” – a crackdown on tech giants on data security and alleged monopoly practices, and new rules for the private education sector.
The CSI 300 index, which tracks the largest listed stocks in Shanghai and Shenzhen, has fallen nearly 9% since the end of June, while the Hang Seng index is down nearly 14%, pushing prices down further. benchmarks from across Asia.
For much of the rest of the continent, market sentiment continues to closely monitor the pandemic.
COVID infections and hospitalizations in India, which faced a second deadly wave in April and May, have fallen sharply since, and the country’s stock market has recovered quickly. Its Sensex index has risen 5% since the end of June, while the blue-chip Nifty 50 index has hit an all-time high. The Indonesian stock market, where cases have been declining since last month, has moved sideways so far in the third quarter.
“The stringency of containment measures is inversely correlated with market performance, in particular stocks sensitive to domestic demand,”” Garner said. Asia and emerging markets are generally lagging behind the West in immunization, “it will not be until the end of the fourth quarter, at the earliest, that Asia comes out of this cycle.”
Additional reporting by Masayuki Yuda in Bangkok.