Asian Stocks Took Their Cues From the US, Wiping Out 2018 Gains

Asian equity markets tend to track what happens in the U.S. more than most, and Tuesday was no exception.

Just a few hours after the late-in-the-day plunge that saw the Dow Jones Industrial Average slide as much as 6.3 percent, bourses over the other side of the world started to open, taking their cue from New York to provide Asian traders with their own white-knuckle ride.

By the end of Tuesday, Japan’s Nikkei 225 Stock Average — more closely correlated with the U.S. than other markets in the region — had entered a correction, while the Hang Seng Index in Hong Kong was down the most since 2015, as gauges of volatility throughout Asia spiked.

As U.S. index futures signaled another session of pain ahead there, the MSCI Asia Pacific Index was down 3.5 percent as of 4:25 p.m. in Hong Kong, concluding a three-day rout that erased an advance this year that topped 8 percent.

“This is a test of nerves,” said John Padilla, head of equities at Metropolitan Bank & Trust Co. in Manila. “But if you look through the chaos valuations have become reasonable so it’s a good opportunity for the strong-hearted. The bias has been for investors to stay cautious and wait for the selloff to blow over.”

Just what triggered the selloff is up for interpretation, with the lack of a specific catalyst leaving some traders bewildered and wondering what comes next. Investors in Asia are reacting in different ways, with one of the world’s top-performing macro hedge funds, Asia’s PruLev Global Macro Fund, actively managing risk after starting to pare down shares a few weeks ago. At Janus Henderson Investors in Singapore, a fund manager has boosted defensive stocks, while a Thai brokerage is asking clients to hold on to cash.

Read more here about how some investors see the rout panning out.

In terms of what comes next, Tuesday’s plunge pushed the Asia Pacific gauge’s 14-day relative strength index below 30, the level that traders typically see as a sign of excessive losses.

While some analysts said the pace of the market’s slump caught them by surprise, they pointed out that conditions may have been ripe for an adjustment after its rapid advance.
The Nikkei Stock Average Volatility Index surged the most since 2013 after its counterpart in the U.S. — the VIX — jumped by record on Monday.

Here’s a sample of other investors’ views after a chaotic day:

BNP PARIBAS (Felix Lam):

• “Investors should not panic as the selloff in Asia markets is a natural part of a market cycle where we are seeing inflationary pressures following good corporate earnings”
• “And there is a silver lining to this, given that corporate earnings is dependent on the level of inflation and interest rates at which either is low in absolute terms compared to what we have experienced historically.”

FIDELITY INTERNATIONAL (James Bateman):

• “What we have seen is perhaps the greatest sign of real health in markets for a long time. The tech-fueled rally in the U.S. had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Fed chair. It would be more worrying if markets didn’t react to all of this”
• “Even accounting for recent price action, U.S. equities remain up by around 50 percent since early 2016. The current price action may feel unusual because we have become so used to a low volatility environment, with economic data having been consistently positive across the globe in 2017.”

JANUS HENDERSON (Sat Duhra):

• “I’m not surprised by the recent move in markets. We have been voicing caution for some time. The market had got ahead of itself and momentum was the style of choice for investors”
• “What has been frustrating is the disconnect between fundamentals and equity valuation. Investors still tend to focus on relative valuation, which is pointless when everything is expensive”

MAGELLAN FINANCIAL GROUP (Hamish Douglass)

• “This is very early days, in terms of the last few days. We could have a bounce back, but until we actually see the whites of the central banks’ eyes, and we actually see some data on inflation later this year, I think I just want to be patient and cautious”

SCB ASSET MANAGEMENT (Narongsak Plodmechai):

• “We have anticipated some correction in the first quarter, as valuations are so stretched with fresh records almost everyday. But it’s quite a surprise with the speed and scale of the slide”
• “Still, the 5 percent to 10 percent correction should be acceptable. We don’t anticipate that it’s a changing trend. 2018 will be a year of slowdown for equities, but equity outlook remain positive”

SOMPO JAPAN NIPPONKOA ASSET MANAGEMENT (Kenji Ueno):

• “We don’t need to price in the risk that rate increases will put the U.S. economy into a recession”
• “Japan’s economy is on a firm footing and corporate profits are solid. The selloff this time may be a short-term adjustment”

KTB SECURITIES (Win Udomrachtavanich) :

• “I have advised my clients to hold cash now until the market stabilizes. We advised them to divest all of their U.S. equities late last year because of valuations. The advice today is for them to hold cash and wait for any big correction before buying some bargain shares”

— With assistance by Matthew Burgess, Ian C Sayson, Keiko Ujikane, Anuchit Nguyen, Livia Yap, and Heejin Kim