Growing disconnect between Asian and US equities

Asian stocks ended yesterday’s session heavily in the red and there’s nothing to suggest today will be any different.

While investors weigh the possibility of events ahead of the FOMC meeting, recent US data of pending homes sales declined more than expected at -0.4% in June, compared to 6.7% in May. Stocks in the US reflected this cautious mood and both the Dow and S&P500 retreated.  Regardless of what happens in the US, we have been seeing a growing disconnect between equity markets in Asia and the US since the market rout in May. 

It is clear when we look at the M2 chart when QE started after the financial crisis, the rise of the equity markets, both in the US and Asia, are correlated; signalling the flow of hot money into emerging Asian equity markets in the global search for yield. It would be inaccurate to look purely at stimulus when the cause was also the accelerated growth of the Chinese economy; kick-starting the commodity super cycle. 

Asian countries which are top trading partners of China benefited from the strong Chinese demand, prompting countries like the Philippines, Thailand and Singapore to have phenomenal returns in the equity markets. 

Today we are at the tail end of QE, with half of the economists surveyed by Bloomberg expecting tapering starting in September. Regardless of when we think tapering will occur, the market has priced in this expectation and we have seen US equities continue to rally, with EM Asian equities lagging behind. 

The reasons for this laggard can be explained by the poor outlook in the Southeast Asian region due to the slowdown in China and Europe. We don’t expect this headwind to ease anytime soon, given the PMI numbers coming out of China continuously showed contraction. Despite the country’s efforts in support and stimulus, and their effort to keep the economy moving and not keeping their stock market buoyant we expect this to be sector specific. So, although China and Hong Kong stocks had a strong recovery last week with a 3% return, we expect this to be short lived. The pace of China’s economic growth has spurred debates amongst economists, with some lowering their forecasts to as low as 6%, the majority at the official 7% to 7.5%. The bottom line is, slowing growth in China is imminent; the question is how slow and how much of an implication does it have on us living in this region?

Investors should remain vigilant to weather through this period of uncertainty; we still hold the view that yields remains attractive in equities.

We hold the view that Singapore’s efforts in diversifying its growth from exports to services will be its advantage during the period of uncertainty. Although the Q2 earnings have been lacklustre, with companies unable to produce optimistic outlook, this is unsurprising given the headwinds in global growth. Technically, we see the STI trading in a channel, with support at 3200, a convincing move to the upside will be if it breaks the 3260 price level with a price target of 3310.

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