Fears of a US recession following a weak US jobs report and the unwinding of the yen carry trade due to a hawkish Bank of Japan have caused turmoil in markets globally, especially in technology stocks. While the market has calmed after the sell off and valuations have become more reasonable, volatility will likely remain elevated, given ongoing uncertainties in the market.

Chinese equities, especially China A-shares, are most immune to global market turmoil and have become a defensive market. Additionally, the Hong Kong market is also expected to benefit from a more aggressive rate cut path in the US.

Meanwhile, Southeast Asia is less impacted by the broader selloff of the tech sector, given its low exposure to the market. The region is also poised to benefit from the expected Fed rate cuts.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 July 2024

China / Hong Kong equities

• The lower-than-expected ISM manufacturing and July non-farm payroll numbers in the US have ignited market worries about the economy going into recession. The market priced in more than 100bps rate cuts this year with a 50bps cut in September, as fears grow that the Fed might be too late to cut rates. These fears of a recession, together with the unwinding of the yen carry trade resulting from a more hawkish action and comments from the Bank of Japan, caused turmoil in the market.
• Although we believe the US will not enter a recession any time soon, we have been saying that market volatility will likely increase as uncertainties arising from the US election and geopolitical risks rise.
• Hong Kong China equities will be less directly affected by the global market turmoil.  With a more aggressive rate cut path in the US, the Hong Kong market will benefit as more sectors are interest rate-sensitive. This also helps lower the cost pressure on consumers and companies. Meanwhile, while China’s economy remains weak, there is increasing evidence that the economy is finding its bottom. The gradual appreciation of the RMB also helps stabilize market sentiment.

China A-shares

• China A-shares are domestically focused and are the most immune to global market turmoil. It becomes a defensive market when global sentiment is weak. However, the lower long-term bond yields reflect a weak economic outlook.
• There are improving signs in the economic data with a more favorable comparison base. However, the market finds it difficult to regain momentum without more concrete policy details.

Asia ex-Japan equities

• The correction in the US equity market has been led by the unwinding of crowded trades in tech- and AI-related names. As Southeast Asia has much less technology exposure, it is less impacted by the selloff. As long as the US is not dipping into a recession in the near term, and with the Fed starting to cut rates soon, Southeast Asia will benefit as these countries are likely to follow to cut interest rates as inflation in the region is stable. A lower USD will also help with the funding costs in these markets.
• After the market correction, valuations of the Korea and Taiwan markets have become closer to their historical averages. These markets will likely become more volatile along with the US market, but their valuations are not as demanding compared to those of the US.

Emerging market ex-Asia equities

• The unwinding of the yen carry trade has caused outflows from emerging markets as investors de-risked. It also caused the selloff in EM ex-Asia currencies. The upcoming US election may have significant implications for emerging markets in Latin America and Eastern Europe. The heightened geopolitical tensions in the Middle East also remain a risk.
• On the other hand, the faster rate cut in the US will help support the market.

Japanese equities

• The unwinding of the yen carry trade, partly due to the hawkish action and comments by the BOJ, has caused significant market volatility. However, following the market selloff, the Japanese market is now more balanced in terms of currency and equity valuation.
• The market will likely remain volatile, and any concern about further interest rate hikes by the BOJ will likely trigger even more volatility again. But with the JPY going back to a more reasonable level (although still undervalued from a PPP basis) and short JPY positions being reduced, the market will focus more on fundamentals.
• Second-quarter earnings, so far, are better than expected, with increasing buybacks by the companies and potentially lower imported inflation due to a stronger JPY. Hence, the stress of a potential selloff will be less as the market is now back to an attractive valuation level.

Asia investment grade bonds

• The downward shift of the US yield curve and a weaker sentiment helped spur inflows into investment grade bonds. As the market is pricing in a more aggressive rate cut by the Fed, investors will likely move to longer duration investment grade bonds.
• However, as yields have moved too fast due to over-pessimism about the economy, the market will need to re-adjust its expectations, depending on the upcoming data.

Asia high yield bonds

• Spreads have been at tight levels below historical averages. The upside on Asian high yield bonds has narrowed. While there is no immediate downside, volatility may rise with weaker market sentiment.

Emerging market debt

• Spreads have been at tight levels below historical averages. With increasing uncertainties in the market, the outlook for emerging market bonds remains volatile.
• Also, the heightened geopolitical risks will continue to weigh on the market.

Gold

• Gold prices will go through a consolidation phase after breaking their historical high. With lower yields and a weaker USD, the outlook remains positive for Gold.
• Gold also remains a good geopolitical hedge in the medium to long term. In addition to geopolitical worries, investors are concerned about the de-dollarization trend, which will likely continue to support gold prices.

Multi-asset

• A multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically. In an uncertain environment with low yields, income becomes an essential source of return for investors.

Know more about Value Partners Asian Income Fund

^{The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

^{Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.}

^{This article has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.}