(Bloomberg) – The US-led banking turmoil is driving money into Asian assets, with investors betting that China and the region’s emerging markets are in a better position to weather the fallout.
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A Citibank analysis of global financial conditions shows that Asian financial markets have become less tight than in the US and most Asian currencies have gained ground against the US dollar. An index of financial stocks in the ex-Japan region has risen since March 10 – the day the Silicon Valley bank collapsed – compared to a nearly 10% decline in America’s banking index over the same period.
“We believe that Asia is still relatively well isolated,” said Johanna Chua, Citi’s executive director and head of economic and market analysis for Asia Pacific. “A US-centric slowdown means the US dollar will weaken, which tends to support capital flows in Asia.”
Economists say one factor in favor of the Asia-Pacific region is a generally softer monetary policy stance, with central banks in Australia, South Korea, Indonesia and India among those pausing their tightening cycles. China, with looser monetary policy and a delayed reopening due to Covid, is the main attraction for investors.
This is reflected in the $5.5 billion inflow into emerging market equity funds in the four weeks to the end of March, led by Asia, according to figures from TD Securities, citing EPFR Global data. More than 70% of that money went to China. At the same time, developed market equities suffered $8.6 billion in net outflows, with the US being the hardest hit.
“Investors still see emerging Asia as perhaps their preferred region, followed by Europe and then maybe the US,” David Chao, global markets strategist for Asia-Pacific at Invesco Asset Management, told Bloomberg Radio on April 4 . “If you think the Fed will hit a pause button on rate hikes, that would certainly drive capital inflows into emerging Asia.”
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Ending the Fed’s rate-hiking cycle amid risks to financial stability and signs of slowing demand could help Asia by easing the pressure of a strong dollar on external finances and reducing the greenback’s safe-haven appeal.
The Asian Development Bank said this week that Asia’s emerging economies, led by China, are on track for faster growth and slower inflation this year and next, while advanced economies contribute to a darker global outlook.
China’s recovery is expected to spread across the region, which also benefits from supply chain diversification, booming commodities and a lack of excessive debt growth, said Frederic Neumann, chief Asia economist at HSBC Holdings Plc in Hong Kong.
Citi’s Chua believes Hong Kong and Thailand, which are benefiting from China’s reopening, and domestic service-driven economies like India and the Philippines appear “relatively more resilient” to a global growth shock. “Small, open economies” such as Singapore, Vietnam, South Korea, Malaysia and Taiwan would likely be more vulnerable to these spillovers.
The banking turmoil could also mean that US-invested Asian tech money could now find its way back.
“Within Asia, I think Singapore will be the main beneficiary,” said Prashant Newnaha, macro strategist at TD Securities. “Singapore has a strong legal and banking framework and aims to establish itself as a leader in technology and crypto in the region.”
Still, there are risks. The recent dismal factory data from China dampened confidence in the speed of the country’s recovery. And China’s deteriorating relationship with the US increases the potential risks of investing in places like Hong Kong and Taiwan, said Invesco’s Chao.
Also, Asia is not entirely immune to the financial instability spreading from the US.
“The outlook really depends on whether things stabilize in Europe and North America,” said Jonathan Kearns, chief economist at Sydney-based investment management firm Challenger Ltd and a former Reserve Bank of Australia official. “If there is some degree of sustained turbulence, it will spill over into Asia as well.”
–Assisted by Garfield Reynolds and Bonnie Au.
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