‘Tsunami of risk aversion’ hits Asian stock markets

‘Tsunami of risk aversion’ hits Asian stock markets

Trader John Bishop works on the floor of the New York Stock Exchange on Monday. (AP photo)
Trader John Bishop works on the floor of the New York Stock Exchange on Monday. (AP photo)

SINGAPORE: Asian stock investors woke up to another day of market slumps after salvos from the US and China in their ongoing trade war.

Declines were tempered by mid-morning after China set its yuan reference rate stronger than analysts expected.

China’s shock and awe tactics had left investors reeling, sending a 'tsunami of risk aversion across global markets,' said Stephen Innes, a managing partner at Vanguard Markets Pte in Singapore. China’s Tuesday yuan fixing is “ambiguous enough to keep two-sided interest alive while still conveying a message to US trade hawks that in no uncertain terms will China be a pushover if trade talks ever resume,' he added.

Asian stock markets saw a sea of red, with Japan’s Topix index down 1.9% at the morning break. US stock-index futures fell as much as 1.9% before narrowing losses to 0.7%.

Yesterday, the S&P 500 Index tumbled 3% after China allowed its currency to fall in retaliation for new US tariffs, prompting the Trump administration to officially call China a currency manipulator. Today China set its yuan fixing stronger than 7 against the US dollar. The continued plunge has dragged equity markets across Hong Kong, Japan, Indonesia, Korea and Malaysia into negative territory for the year with India teetering on the edge.

For many investors in Asia, the latest actions in the US-China trade war meant a run towards haven assets such as gold and the yen.

Overexposed to Risk

'The big worry for investors is whether they are overexposed to risk assets. The situation has become extremely fluid in the wake of the very severe escalation of the trade war by Trump,' said Johan Jooste, a managing director at Purple Asset Management in Singapore. 'Our sense is that previous dips were always treated as excuses to buy and that investors may now be running more risk than they might be comfortable with.'

'Cash or safe bonds will yield almost the same now given how low yields have dropped. There is a risk that without new intervention or de-escalation, risk assets mostly equities will be less popular than before,' Jooste said. 'If growth fears were an issue before, it is even more of an issue now.'

'We were positioned long duration, so the Treasury market is our friend. We’re not ready to deploy new money into equities yet, though,' he added.

Domestic Sectors

'The renewed tension escalated pretty dramatically in the last few days in the speed and scale we had not seen before. We are quite well hedged on this front as we believe this trade war is a multi-year or even multi-decade problem that cannot be resolved in the short term,' said Kerry Goh, CEO and CIO of Kamet Capital Partners Pte., a Singapore-based multi-family office.

'We are well positioned in domestic sectors that should steer clear of possible tariffs -- healthcare, utilities, airports, telco and tech,' he said.

No Change in Tactic

'I don’t think Asian stocks have fallen enough to warrant a change in tactic. It doesn’t look like we are at that point now,' said Chris Weston, head of research at Pepperstone Group in Melbourne, Australia. 'Probably that point will emerge if central banks intervene on currencies. Any signs of Xi and Trump going back to the drawing board will also help.'

Buying Opportunity

'There is more downside to come but as long as interest rates remain low it is a buying opportunity. The crisis scenario requires that falling markets are accompanied by spiking rates,' said Bryan Goh, chief investment officer at Tsao Family Office in Singapore. 'In a world which is more insular and less cooperative a country’s economic power lies in its ability to consume, not produce. You can put up factories in a year or two but it takes a generation to produce a consumer. Invest through this lens.'

Reduced Stocks

'The US-China trade tensions have escalated beyond my anticipation,' said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd. in Tokyo. 'We have reduced the weightings on stocks a bit, and instead we’ve increased cash positions and the weightings on bonds a bit.”

Three Biggest Risks

'The three biggest risk factors in the market right now are called Donald Trump, Boris Johnson, and Shinzo Abe,' said Olivier d’Assier, the head of applied research for Asia-Pacific at Axioma in Singapore. 'The best (safest) place to be are value, profitable, no debt, large-cap stocks with high dividend payouts.'

'We are seeing investors pour into global safe havens like the yen, gold, US Treasuries, and this is likely to continue in the short term given the heightened uncertainty caused by the current geopolitical environment.'

'Cash is a safe haven only if it is in your portfolio currency as FX risk has increased. Treasury bonds are a traditional safe haven but given the moves we have seen there since the start of 2019, which has erased all of the move from the Fed’s tapering of the last two years, we may be close to a high there too. Especially, if recession becomes the consensus forecast for 2020.'

Beginning of Bigger Falls

'I firmly think this is just the beginning of much bigger falls. We are seeing break downs across most market bellwethers across FX, equity and bond markets. I see 15-20% downside in assets from here,' said Nader Naeimi, the head of dynamic markets at AMP Capital Investors Ltd. in Sydney.

Gold Hedge

'Overweight gold and gold mining stocks as the ultimate hedge against China currency devaluation,' said Rainer Michael Preiss, a portfolio strategist at Taurus Family Office in Singapore. 'Many market participants had hoped for a trade deal but now it seems a deal is very difficult to reach and like the situation in Hong Kong, the US-China trade war is escalating.'

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