The Federal Reserve’s shift to interest rate cuts bodes well for Asian assets as many are underowned, and have better earnings prospects and more room to benefit from easing than their global peers.
Money managers and strategists say the central bank’s decision to lower its benchmark by 50 basis points (bps) is less of a gloomy view about the US economy and more about providing greater insurance for a soft landing.
The pivot will help offset many of the negatives facing Asian assets including expensive valuations, China’s slowdown and growing trade tensions, they say.
“The rate cut gives a clear signal to the financial markets, industrialists and householders that the Fed is supporting growth,” said Gary Dugan, CEO at Global CIO Office in Singapore. “The Fed’s action should be taken very positively by Asian markets.”
Asian assets largely welcomed the Fed’s decision from the start of trade on Thursday.
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An MSCI gauge of regional stocks climbed as much as 1.3%, while Japan’s Topix jumped more than 2%, both outperforming the muted reaction of US shares Wednesday. Asian currencies were mixed, though all except Hong Kong’s have strengthened over the past month.
The yen weakened as traders awaited a Bank of Japan decision Friday. Most regional bonds were mixed even as Treasuries fell.
The Fed’s first rate cut in more than four years was accompanied by new quarterly projections that indicated an additional 50bps of easing is expected over its remaining two meetings this year.
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While Fed Chair Jerome Powell cautioned against assuming there would be further such outsized moves, the outcome means Asian central banks have more confidence to ease without worrying about currency pressures.
The Fed’s preemptive step to increase the likelihood of achieving a soft landing by lowering interest rates “could boost risk appetite, driving capital inflows into emerging markets as investors seek higher returns,” said Manish Bhargava, CEO at Straits Investment Management in Singapore.
Corporate earnings growth in Asia is already outpacing the rest of the world. The 12-month forward earnings estimates for the MSCI EM Asia Index have risen 10% this year, compared with 8% for the MSCI World Index, according to data compiled by Bloomberg.
Eastspring Investments is among those saying Asian assets will benefit more than those from other regions from the Fed’s pivot.
US rate cuts followed by a weak US dollar is usually positive for Asian and emerging markets, where earnings are growing at a faster clip than the developed world, according to a research note from the money manager, which is a unit of Prudential. “Compared to US equities, Asian and emerging-market equities are attractively valued and offers diversification against the US.”
The jump in Japanese shares Thursday was driven both by the Fed rate cut and also the weaker yen.
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For Japan, it was probably the ideal outcome that “a large rate cut was announced in the US as expected by the market, but the yen has not appreciated”, said Rina Oshimo, a strategist at Okasan Securities in Tokyo. “Since the BOJ meeting is expected to remain unchanged, attention is likely to focus on BOJ Governor Ueda’s subsequent remarks” after Friday’s policy decision, she said.
Policymakers in a number of Asian countries had already start cutting rates in anticipation of the Fed. Those in the Philippines lowered their benchmark in August, while Bank Indonesia surprised investors by doing so on Wednesday.
“A narrowing interest rate gap and stabilizing capital flows provide a more comfortable backdrop for Asia’s policymakers and investors,” said Homin Lee, a macro strategist at Lombard Odier in Singapore. The Fed’s “decision marks the start of a meaningful easing cycle in next 12 to 18 months”, he said.
Charts: Bloomberg
