(Bloomberg) -- Investors and strategists in Asia warned of fresh pressure on corporate profits and weakness in currencies across the region following stronger-than-expected US inflation data.
While the price report raised the likelihood that the Federal Reserve will continue to tighten policy aggressively, fund managers held to existing positions even as the region’s stocks followed Wall Street lower and a Bloomberg dollar index traded near its all-time high.
Equities headwinds
Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management
“Expect equities to continue to face strong policy headwinds in the next few months, as earnings growth seems unlikely to improve at the current levels and high inflation should ultimately eat into margins.
Expect continued Fed tightening at least for the rest of the year. We may be approaching an inflection point by this year-end for the Fed to transit from policy tightening to neutral before easing toward the latter half of 2023.”
Christina Woon, investment director for Asia equities at abrdn plc
“We’ve not made any changes post the CPI report. We had already been moderating growth names over the quarter into rallies, and that’s been on the back of fundamentals. In tech hardware, the expectations remains that the cycle will remain weak for a while.
We are heading into earnings season again at the end of the month, so another round of checks for how companies are faring in this environment.
For catalysts into the rest of the year, the CCP meeting in mid-October is a key one that people are watching for policy direction out of China given implications of China’s trajectory on wider growth in Asia.”
Sat Duhra, a Singapore-based fund manager at Janus Henderson Investors
“We won’t be making any changes following the CPI numbers but have already been positioning for a tougher period for the consumer and therefore reducing consumer and technology exposure and adding more telco exposure which has been defensive.”
“We see the greatest risk at consumer-focused names and also exporters – we would expect North Asian export data to remain weak alongside Covid restrictions and favor new positions in South Asia with Singapore and Indonesia expected to weather the volatility better than others.”
Currency vulnerabilities
Trinh Nguyen, a senior economist at Natixis SA in Hong Kong
“We see the Korean won, the Thai baht and the Malaysian ringgit vulnerable as they likely won’t move as much as the Fed and inflationary pressures remain high.
We see both INR and IDR more supported than low yielders that have limited room to move and also exposed to the slowing global trade cycle through higher export share of GDP.”
Suresh Tantia, senior investment strategist at Credit Suisse Group AG
“We see the impact of the US inflation marginally negative for Asia ex-Japan. Importantly, the impact is felt via the USD, which is already at a 10-year high, although continues to see risks of moving higher. A strong USD has been weighing on emerging market growth and flows.
We continue to be cautious and underweight in Asian equities over 3-6m, in line with our developed markets view as recession/growth risks have increased, while leading central banks continue to be hawkish to contain inflation.”
Asia’s dollar bonds
Mark Reade, head of fixed-income desk research at Mizuho Securities Asia
“Persistent inflation and further FOMC rate hikes foreshadow a challenging outlook for most global risk assets.
While the PBOC’s divergent stance of policy easing might allow Chinese assets to outperform, Asian dollar bonds are unlikely to emerge unscathed.
With risk assets increasingly vulnerable and global growth set to slow, we continue to favor higher quality credits.”