Asian Equities Protected From Worst of U.S. Selloff

While Asian equities often take their lead from Wall Street, the pattern is not particularly pronounced right now. A big stateside selloff doesn't always translate across the Pacific, meaning Asian stocks offer protection during a bad U.S. bear market.

Asian markets on Wednesday saw their declines ameliorate slightly during the trading day. Those that closed earliest, closed on the largest losses. But the stock-price falls dealt half the kind of damage seen in New York, where the Nasdaq plunged 5.2% in a "sell everything" day, the worst for U.S. stocks in two years.

For Australia, the ASX 200 ended with a 2.6% fall in Sydney. The Topix in Japan closed with a 2.0% loss. In Hong Kong, the Hang Seng lost 2.5%.

But the export-driven markets in South Korea, where the Kospi ended 1.6% lower, and Taiwan, where the Taiex also finished 1.6% down, weren't as badly bashed as they might have been. While chip-and-phone maker Samsung Electronics fell 2.2%, companies such as battery manufacturer LG Energy Solution even inched into gains, closing up 0.3%.

Mainland Chinese markets have generally been insulated by the walled-off nature of the Chinese economy, and the limited opportunities open to domestic investors. The CSI 300 index of the largest mainland Chinese listings ended "only" 1.1% down.

Indian equities, some of the last to remain open in Asia, are moving into the green as I write. The Nifty 50 has just crossed to a 0.04% gain, with the Sensex also showing an extremely slight advance, of 0.05%.

Like companies in China, Indian equities have a massive home market to rely on. Indonesian companies can also turn to the fourth-largest population in the world, and the Jakarta Composite Index moved only 0.6% lower on Wednesday, nowhere near the order of losses on Wall Street. The Indonesian government on Wednesday set a solid economic growth target of 5.3% for 2023.

The Straits Times in Singapore ended the day down 0.9%, and Thai stocks nudged only 0.5% lower. Malaysian markets suffered the most in Southeast Asia, the Bursa Malaysia index ending down 1.3%.

The main explanation behind the divergence is that inflation isn't the same kind of concern in Asia as it is to U.S. central bankers. Yes, central bankers in places like Australia, India, South Korea, Taiwan, Hong Kong, Singapore and Indonesia are raising rates. But they are doing so off low bases. Even more important, the two largest economies - China and Japan - are holding steady on very low rates.

They can afford to do so. In Japan, inflation stands at 2.6% as of July, the fourth straight month where it has run above 2%. But the government has long strived to achieve 2% inflation - and economists expect it to swiftly fall back below that level, with Nomura forecasting a rate of just 0.5% by the end of next year.

Asian inflation in general is likely to peak in Q3, as food and energy hikes pass through, and fall in Q4.

China posted surprisingly mild inflation for August, with price increases moderating to 2.5% from the 2.7% pace in July, as I explained when the National Bureau of Statistics announced them on Friday.

That's not to say life is rosy for Chinese companies in particular. They have their own difficulties to contend with, most prominently slowing overall growth, lackluster consumer confidence, and the massive uncertainty surrounding snap lockdowns sweeping the country.

Climate change has also hurt, with both drought and flooding hitting central parts of China over the past few weeks. That will hamper agricultural production, but the lack of hydro power from the Yangtze River also led to power brownouts and electricity rationing, disrupting factory production.

The independent analysts at T.S. Lombard have just slashed their forecast for full-year growth in China to 1.6% for 2022, down virtually an entire point from their prior 2.5% estimate. That's way, way off the official target of "around 5.5%," though Lombard reckons the Chinese state will "massage" the economic data to deliver a figure as high as 3.5% to 4%, even though that's not what's really happening on the ground.

"The bottom line remains that while Covid containment is in place, China activity, stimulus efficacy and markets will all disappoint," Rory Green, Lombard's chief China economist, states.

The uncertainties about Asian economies have been more clearly reflected in Asian currencies rather than the equity markets.

The South Korean won on Wednesday traded as low as 1,395 to the U.S. dollar, its lowest level since 2009. The Chinese yuan, down 9.4% this year, is heading for its worst year against the U.S. dollar on record, and is approaching the C¥7 barrier to the greenback. And the yen, as I've outlined in greater detail, keeps breaking through support levels, no sooner busting the ¥140 barrier at the start of this month than testing ¥145.

The phenomenon revolves more around the U.S. dollar's strength than inherent weakness in the Asian currencies. And a weaker currency supports Asian exporters selling into the United States. For now, that leaves Asian equities better off, and less volatile, than Wall Street, as we see today.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.