08/20/2015
Asia / Equities
We are now underweight on Asian markets, reflecting our cautious stance as we see a long list of risks that could emerge in the coming months.
Asia markets continue to weaken under the shadow of China policy uncertainties. Sentiment was already fragile on US Federal Reserve rate hike fears. China’s market rout and Chinese yuan devaluation will possibly lead to more growth downgrades and currency weakness.
The yuan revaluation was not unexpected but the timing was, and market reaction has been somewhat underwhelming in our view. We believe there is general complacency in the markets. This is also reflected in the CBOE Volatility Index, which should not be trading at its current low levels. Credit spreads are already demanding for higher levels in both the investment grade and junk grade bonds.
We remain watchful of the long list of risks in the following three months, ranging from Fed rate lift-off to corporate bond defaults to oil prices hitting a global financial crisis low. As we have highlighted earlier, the prospect of Fed hiking rates leading to higher US dollar and interest rates is the main source of risk which we are not convinced that markets are ready for.
We remain cautious on Asia markets. The yuan devaluation has added another new paradigm of risks to currency weakness and could expedite capital outflows out of emerging markets on a perceived higher level of global risks. We have downgraded Hong Kong’s Hang Seng Index and H-shares, as well as China’s A-share market to Underweight.
We have also downgraded Singapore, Thailand, the Philippines, South Korea, and Taiwan by a notch to Underweight from Neutral. We believe that growth and earnings downgrades are likely to accelerate in these countries in the coming months. With macro risk (especially on the currencies) high in the Asean markets, we believe risk appetite is unlikely to return in the near term. Downside risk to currencies also suggests that outflows could accelerate. As we do not see any safe havens, all markets in Asia are now Underweight to reflect our bearish stance.
