What the Weaker Dollar Means for Asia
At the start of the year, Lyxor viewed Asia as a potential equity hotspot. With everything selling off, it’s been hard to keep sight of that in recent weeks, but the fundamentals – a weaker US dollar, Chinese growth, and global recovery – remain as sound now as they were then.
Asia equities have reacted to the S&P correction and rising volatility, but they seem less concerned by rising treasury yields. As long as the USD doesn’t start to appreciate like it did between 2011 and the end of 2016, it should continue to provide support: less need for rate hikes to prop up currencies, lower USD debt servicing ratios, and more foreign inflows. Now is a good time to look at these markets through the lens of the greenback weakness – after all growth, inflation, and rate hikes had many expecting the opposite. The experience has been jarring, but what if it’s only temporary?
At the very least, there can be no complacency when investing in Asia. These markets aren’t homogeneous, given varying degrees of political risk and their different sector make-ups, so your search for opportunity may be more demanding. Valuations may be more appealing when the dust settles on this correction, particularly in Japan, but some caution is needed – some markets are more expensive than others, have more of their borrowing in dollars, and are more exposed to currency gyrations.
The section below covers our latest thoughts on key Asian markets and the correlation between local indices and the strength or otherwise of their currencies vs. the USD. The higher the number, the more a market tends to rise when the local currency is strong and the dollar is weak. The results aren’t always what you might expect – most people see South Korea as an export-driven economy like Japan, but the correlation between the Korean won and the MSCI Korea Index is actually positive (i.e. equity markets perform better when KRW strengthens), unlike that of the yen and the MSCI Japan.
Asia markets: Outlook & correlation with local currency moves
Asian markets have reacted to the S&P correction and rising volatility, but have a good combination of improving fundamentals, moderate valuations, and still reasonable liquidity – as long as the USD does not strengthen. China may not continue on the stellar trajectory of last year, but both FX and growth have stabilised, meaning its economy is the anchor of markets in the region. We favour the consumption and domestic stories.
The sell-off doesn’t undermine our positive view on Japan. Growth looks strong, as do earnings, and monetary policy remains largely out of sync with developed market central banks. Post-correction valuations look appealing. We focus on domestic sectors, excluding financials.
Chinese equities benefit from robust equity flows (through southbound on the offshore market), the positive perception of reforms, and an only gradual growth slowdown. But we are neutral on the market given some concerns over valuations, particularly of growth stocks. We do not expect China to outperform broader indices this year.
South Korea +0.53
In our view, South Korea still offers the greatest value in AXJ. The earnings growth surge and signs of improving governance have triggered a market re-rating. North Korea tail risk appears to have receded for now.
Earnings growth has taken a pause, having been disrupted by demonetisation and the implementation of the goods and sales tax. Consumption growth is resuming and volume growth picking-up. We are tactically underweight. We expect the lull in outperformance to continue but reform progress shouldn’t be underestimated.
Indonesian growth has been largely disappointing, despite signs of strength at the back end of 2017. Domestic consumption and credit growth remains weak, but earnings growth has generally met analyst estimates. Reforms are planned, but their implementation appears challenging.
Growth momentum is strong and earnings are showing signs of life, notably in the domestic part of the market. Financials in particular should benefit. Factor in an improved current account surplus and you can see why we favour Thai equities.
ASEAN – Malaysia +0.437
Growth momentum is improving, earnings are getting better, and politics could become less uncertain after forthcoming elections in Thailand and Malaysia. The domestic story is strong.
Source: Lyxor & SG Equity Strategy, Bloomberg. 15 February 2018. Past performance is no guide to future returns. Data is based on 10yr monthly correlations for MSCI indices on each market to end January 2018.
FOR PROFESSIONAL CLIENTS ONLY
All opinions/data sourced from Lyxor & SG Cross Asset Research teams. Opinions expressed are as at 16 February 2018.
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets In Financial Instruments Directive 2004/39/EC.
This document is of a commercial nature and not of a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor International Asset Management or any of their respective affiliates or subsidiaries to purchase or sell the product referred to herein.
We recommend to investors who wish to obtain further information on their tax status that they seek assistance from their tax advisor. The attention of the investor is drawn to the fact that the net asset value stated in this document (as the case may be) cannot be used as a basis for subscriptions and/or redemptions. The market information displayed in this document is based on data at a given moment and may change from time to time. The figures relating to past performances refer or relate to past periods and are not a reliable indicator of future results. This also applies to historical market data. The potential return may be reduced by the effect of commissions, fees, taxes or other charges borne by the investor.
Lyxor International Asset Management (Lyxor ETF), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). Lyxor ETF is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CONFLICTS OF INTEREST
This communication contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees. Please see our investment recommendations disclosure website www.lyxoretf.com/compliance.