Is Asia better placed to handle the impact of US policy tightening?

Emerging economies in Asia are better placed than most other regions to withstand an accelerated tightening of US policy, analysts say, but with a health warning that investors should not rush.

The U.S. Federal Reserve on Wednesday raised interest rates by 75 basis points, the biggest hike in more than a quarter century, and announced further steep hikes for the rest of the year to curb the surge. of inflation.

By contrast, just hours earlier, China’s central bank had kept rates unchanged in the world’s second-largest economy for a fifth straight month.

Expectations of an aggressive tightening in the United States had already prompted a sharp sell-off in global stock, bond and even cryptocurrency markets, although Asian currencies and equities rallied on Thursday.

Foreign investors have withdrawn money from emerging Asia, excluding China, for five consecutive months, worried about inflation and the region’s reluctance to raise rates amid slowing growth world.

Now Asia is under pressure to tighten.

Galvin Chia, emerging markets strategist at NatWest Markets, cautions against reading too much of Thursday’s rally, warning that the coming weeks could be volatile.

“There’s still a bit of wiggle room on what the Fed does next,” he said.

“I would say investors wouldn’t jump on it with bigger, longer-term investment decisions at this point. It’s still going to be a bit hectic.”

Asian economies are more supported by current account surpluses and stable currencies than in previous periods when Fed rate hikes sucked money out of emerging markets, said Kerry Craig, global market strategist at JP Morgan. Asset Management.

Local markets have sold off this year, although the moves have been much softer than the violent capital outflows seen during the US tightening cycles of 2016 and 2004.

“But we’re still very conservative and neutral in terms of asset allocation, we’re not saying, ‘Run out and by these things now,'” Craig said.

“We’re just saying they’re becoming more attractive, thinking about where to find growth in portfolios” and investors can wait to see what happens to growth and inflation.

China remains a wild card.

Authorities in the country eased regulatory clampdowns and Covid-19 lockdowns this month, but questions remain about how quickly the economy will recover.

Economists say the People’s Bank of China has little room to relax given the Fed’s aggressiveness and Beijing’s wariness of debt bubbles.

Diverging Sino-US policies wiped out China’s yield advantage, triggering a record monthly fall in the yuan in April as capital flowed out. The Chinese currency has since stabilized.

Investors withdrew $4.9 billion from emerging markets last month, extending a third month of outflows, according to the Institute of International Finance.

Foreigners reversed course in the last week of May and bought Chinese stocks, even as they reduced their holdings of Chinese bonds for a fourth month.

“The word with China is stability and control,” Mr. Craig said.

“They want to see there’s a lot more control and stability factored in, in terms of currencies, bonds and stock markets while they focus on the economy.”

Underscoring this caution, China’s cabinet said on Wednesday it would act decisively to bolster support for the economy, but such efforts should not lead to excessive monetary issuance and an “overdraft of the future.”

How other Asian central banks react to their domestic inflationary pressures is key.

NatWest’s Chia points to a sell-off in Indonesian bonds this month, evidence that investors want to see the dovish central bank change its stance.

An aggressive Fed will pressure Asia to “raise rates, in part because of the heightened risk of capital outflows and weaker currencies,” said Rob Subbaraman, head of global macroeconomic research at Nomura.

“But I also think that many Asian economies are now facing their own inflationary pressures, independent of the Fed.”

Mr Subbaraman changed his mind about keeping the Bank of Thailand on hold, now predicting that it will raise rates at the next two meetings. He also expects “aggressive” rate hikes in India in the second half.

Updated: June 18, 2022, 04:30

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