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March Headwinds Return for Asia Stocks, With a Twist

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It feels like deja vu for Asia, with a resurgent dollar, worries over bond yields and weakness in China threatening to weigh on stocks just as they did in March. But investors say the market is far more resilient this time.

Outweighing the negative impact of the hawkish pivot by the Federal Reserve are a deepening valuation discount versus major peers and falling coronavirus cases in the region. A slump in bond yields is also helping, with those on 10-year U.S. treasuries sliding to 1.44% from above 1.7% in March.

All of this suggests a similar period of underperformance as in March — when the MSCI Asia Pacific Index fell 1.5% and lagged the global equity benchmark by four percentage points — is unlikely.

“Yield sensitive groups — which fell on inflation and tightening fears earlier this year — tech, utilities, staples, health-care could begin to outperform the groups that led in the beginning of the year,” said Thomas Hayes, chairman of Great Hill Capital. The New York-based fund manager raised its allocation to Chinese tech stocks after the Fed’s move, particularly Alibaba Group Holding Ltd., he said, citing cheaper prices after the recent selloff.

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Indeed, valuation seems to be a key reason to maintain allocations to Asia for some investors. The stock benchmark is trading at just 15.8 times its estimated earnings for the next 12 months, and its multiple gap with the S&P 500 Index remains below the five-year average, according to data compiled by Bloomberg.

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“I expect Asian equities to be more resilient this time around given the valuation differential,” which has widened since February, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.

That gap is even wider when compared with 2013, when then-Fed chairman Ben Bernanke’s landmark congressional appearance sparked a “taper tantrum” of outflows from emerging markets, causing the Asian gauge to plunge about 11% over the next month. That year Asian stocks traded at a modest 1.5 point P/E discount to their U.S. peers, compared with an average five-point difference in 2021.

Expectations of a repeat of the 2013 outflows are mostly non-existent, with investors highlighting the Fed’s relatively mild language around tapering and stronger external balances in Asia.

Still, moderating growth in China is a headwind. Chinese shares are this month’s worst performers in Asia, with the CSI 300 Index down more than 4%, as policymakers seek to slow the pace of credit growth and the government steps up its interventions in markets.

Union Bancaire Privee reduced the size of its overweight in Chinese equities ahead of the Fed meeting given that the country’s economic cycle is “more advanced” than other regions and regulatory risks remain significant, according to Kieran Calder, head of Asia equity research.

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On the plus side, a drop in the rolling five-day change in Covid-19 cases to a two-month low and increasing vaccinations are boosting broader optimism about growth in Asia. Countries are once again eyeing travel bubbles and even vaccine laggard Japan is making visible progress.

And as for the jump in the dollar, its rebound is seen as short-lived by the likes of JPMorgan Asset Management and Goldman Sachs Group Inc, despite the hawkish tilt from Fed policy makers.

“We don’t see the dollar strength to last now, actually rather see downside from here,” said Adrian Zuercher, head of global asset allocation at UBS Global Wealth Management CIO. “The Fed was more hawkish than expected at this meeting, but with what they’re projecting for end-2023, it still looks like a hawkish blip in a dovish overall stance.”

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