by Tan Shih Ming
With the first U.S. rate hike in almost a decade widely expected later this year if not next month, most Asian stock markets have been weak lately, but analysts believe Asian equities will not suffer heavy losses due to the looming U.S. rate liftoff.
Last week, the U.S. Labor Department released a solid jobs report that bolstered the case for the U.S. Federal Reserve’s rate hike probably as early as next month.
Non-farm payrolls increased 215,000 last month as a pickup in construction and manufacturing jobs offset further declines in the mining sector. The unemployment rate held at a seven-year low of 5. 3 percent, the report showed.
As the uncertainty surrounding the timeline of the U.S. rate hike weighed on the Asian bourses, HSBC Global Research said there is no historical precedent for what happens when U.S. rates rise from the current near zero levels. The best reference point for Asian equity markets is probably 2004. In that year, the markets declined.
But HSBC also stressed that it is not just the timing of the monetary tightening cycle by the Fed that matters, but the trajectory of rate increases thereafter is also important.
If there will be a steep rise in U.S. rates after the initial tightening, whereas markets at the current juncture assume instead the rise will be gradual, this could be very negative for Asian equities.
Judging from the current stock valuation point of view, Capital Economics, an independent macroeconomic research firm, said emerging Asian stock prices are not expensive as their 12-month forward price-earnings ratio are broadly in line with the five- year average.
While the onset of the Fed’s tightening will inevitably dampen investors’ risk appetite, any further losses among Asian markets are not justified and therefore unlikely to be sustained over the medium term.
Nomura Global Markets Research also forecast Asian equities’ upside will continue despite the looming U.S. rate increase. By now, the U.S. rate hike is the world’s most anticipated monetary policy event.
Nomura drew a parallel between now and the Federal Reserve’s announcement to end its bond-buying program slightly more than two years ago.
When former Federal Reserve Chairman Bernanke announced that the Federal Reserve could soon taper its purchasing program in May 2013, there was a severe market sell-off, but when the tapering actually began in December 2013, the market impact was more muted.
Furthermore, Nomura believed that the ongoing quantitative easing by the European Central Bank (ECB) and the Bank of Japan ( BOJ) will provide some offset to U.S. monetary tightening.
The massive bond buying programs of the ECB and BOJ are likely to spill over to Asian bourses, thereby at least partly substituting for U.S. monetary policy in supporting liquidity in the region.
Nomura envisaged when the U.S. raises rates later this year, there will be bond selling, and equities will initially pull back amid uncertainty fueled by momentary bond market disorder.
But when the dust settles, equities will be able to rebound as they stand to receive most of the liquidity outflows from bonds. Enditem