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Investors turn towards Asian developing market stocks with hope as the dollar's rally stops, and the initial tariff imposed by US President Donald Trump proves to be less severe than predicted.
Money managers bought over $700 million worth shares in Asian developing economies outside of China within five days before Friday, effectively ending a continuous streak of seven weeks of outflows. Last week, an MSCI index which covers regional equities outside of China, delivered a 1.8% return to investors, which improves its six-month decline performance to nearly 12%.
This development, along with other factors, signals the gradual recovery of regional equities that underperformed compared to global counterparts last year. The region was affected the most because of increasing dollar strength and the fear of greater international trade wars. While these market conditions have improved, the MSCI Asia EM index still appears to be rather inexpensive, with the forward one-year earnings payout ratio is around 15, as opposed to 22 in the S&P 500 index.
As Han Piow Liew noted, “With these relatively smaller, slower-than-expected ‘Trump Tariffs’, sentiment in these markets will most likely improve and bring some form of bounce back,” “A relaxed trade environment, alongside a weaker dollar and rate reductions, facilitates a more optimistic global context.” Investors seem to be becoming more and more convinced that the tariff threats Trump announced rest primarily on his negotiating table. For instance, the President suggested in early February that he wanted to add a 25% tax on imports from Canada and Mexico but had to delay their implementation once those countries met some of his conditions. He also postponed a proposed cut to tariff free status for certain imports from China and Hong Kong. Since tariff concerns eased, the Bloomberg gauge of the dollar is down more than 3% from its peak in early February. A weaker dollar is favorable for most of Asia’s emerging economies, especially for those with heavy imports priced in dollars.
There are signs the dollar’s long strength may soon come to an end. According to the Commodity Futures Trading Commission, asset managers have reduced their bullish dollar bets for four consecutive weeks leading up to Feb 11, although overall positioning remains long.
“Even if reduced trade tensions continue while not being fully eliminated can pose risks, they can facilitate a more constructive environment for business and investors across emerging markets,” said Manish Bhargava, chief executive officer at Straits Investment Management in Singapore. “Even if there is moderation in tariffs, there will be trade relations universalism, which is good for heavily export dependent Asian economies.”
The reduction of fears related to tariffs have fueled gains in export driven economies like South Korea where the benchmark Kospi index has increased by 5.5% this month compared to a modest 1.3% gain in the S&P 500 Index.
The new artificial intelligence app by China’s DeepSeek has further boosted demand for technology across Asia. Part of that is due to optimism that the AI can be used in a wide range of industries including automotive and eCommerce. Regional equities have received a further tailwind.
"We are pleased with the prospects that come with a new technology product cycle,” explained Andrew Swan, head of Asia ex-Japan equities at Man Group Plc based in Sydney. "As AI evolves, we expect a new set of Asian beneficiaries to emerge because they are exposed to innovation as it moves downstream and democratized AI becomes cheaper and more effective.”
“However, it is still very much conceivable that Trump presses ahead with a great deal of these threats which would mean yet another upward adjustment to the dollar,”says analyst Steve Bannon. The President upped his invective further last week saying that he would probably tax imports of automobiles, semiconductors, and pharmaceuticals around 25 percent with an announcement coming as soon as early April.
For the time being though, Asian shares have done poorly bringing in new buyers. William Yuen, an investment director at Invesco Hong Kong Ltd., said he’s increased investment in some Asean markets like Indonesia and the Philippines.
Worsening performance of emerging hot stocks due to a strong dollar presented the opportunity to invest, said Yuen, whose consumer demand fund has beaten 92 percent of his competitors in the past year. “These macro factors did not support share prices, but there is potential underlying growth and earnings delivery.”
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