Fed Rate Cut Boosts Asia-Pacific Earnings; Thailand May Cut in Q1 2023
Last week, the minutes from the Federal Reserve meeting revealed significantåˆ†æ§ among Fed officials regarding the extent of interest rate cuts at the September meeting. Additionally, last week's higher-than-expected U.S. CPI data and weaker-than-expected employment figures both disrupted market sentiment.
Amidst a broad rally in U.S. stocks, most stock markets in the Asia-Pacific region recorded gains last week. As of last Friday's close, the Nikkei 225 index rose by 970.18 points or 2.51% week-on-week, to 39,605.8 points. The South Korean Kospi index increased by 27.2 points or 1.06% week-on-week, to 2,596.91 points. Australia's S&P/ASX 200 index gained 0.79% or 64.5 points week-on-week, to 8,214.5 points.
Southeast Asian stock markets experienced mixed performances. As of last Friday, the Jakarta Composite Index (JKSE) in Indonesia rose by 0.33% or 24.51 points week-on-week, to 7,520.6 points; the Kuala Lumpur Composite Index in Malaysia slightly fell by 0.45% week-on-week, to 1,633.55 points; the Straits Times Index in Singapore fell by 0.43% or 15.37 points week-on-week, to 3,573.76 points; the Manila Index in the Philippines reported at 7,310.32 points, falling by 2.11% or 157.6 points week-on-week; the SET Index in Thailand rose by 1.79% week-on-week, to 1,470.1 points; the Ho Chi Minh Index in Vietnam increased by 1.4% week-on-week, to 1,288.39 points.
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Wang Xinjie, Chief Investment Strategist at Standard Chartered's Wealth Management Department in China, told reporters from 21st Century Economic Report that since the Fed's interest rate hikes in 2022, the dollar's siphoning effect has impacted the entire Asia-Pacific region. Against the backdrop of rising risk-free interest rates, stocks in the Asia-Pacific region need to offer higher stock returns to maintain a risk premium relative to U.S. Treasury yields. If profits cannot be effectively expanded, this can only be achieved through a decrease in valuations. After the Fed entered a rate-cutting cycle, monetary easing brought relief to the dollar's siphoning effect, liquidity began to spill over, providing certain support for the Asia-Pacific stock markets. Especially on the basis that the U.S. may achieve an economic "soft landing," it ensures the stability of external demand and further strengthens the economic fundamentals of the Asia-Pacific region.
The money-making effect in the Asia-Pacific market has been enhanced.
It can be said that the current trend of Southeast Asian stock markets is in line with market expectations.
Wang Xinjie told reporters that, looking at the past six U.S. interest rate cutting cycles, the Asia-Pacific region has on average achieved absolute returns during the U.S. rate-cutting cycles, especially during non-recessionary periods in the U.S. economy, with returns approaching 20%. Additionally, within half a year after the U.S. rate cuts, the money-making effect in the Asia-Pacific market has been strong.
The stable characteristics of Southeast Asia's economy also give the market a higher expectation for its stock market performance. Bo Wenxi, Chief Economist for China at the China Enterprise Capital Alliance, told reporters from 21st Century Economic Report that due to the stable economic growth in the Southeast Asian region, it may attract more international capital inflows, thereby pushing up the stock asset prices in the region in the short term.
Recently, the World Bank has raised its economic growth forecasts for the Philippines this year and in 2025, mainly due to the growth in service exports and public investment. The Philippine economy is expected to grow by 6% this year, higher than the previous 5.8%. As a result, the Philippines may become the second-fastest growing economy in Southeast Asia after Vietnam. However, there is still uncertainty in the economic development of Southeast Asia. According to the World Bank's forecast, among the larger countries, only Indonesia is expected to achieve or exceed pre-pandemic growth rates in 2024 and 2025, while Malaysia, the Philippines, Thailand, and Vietnam will still be below pre-pandemic levels. Bo Wenxi analyzed that the economic growth potential and policy promotion of Southeast Asian countries will become factors affecting the long-term trend of the region's stock markets.
It is worth noting that recently, U.S. Treasury yields have once again reached high levels. According to data from the U.S. Department of the Treasury, as of last Friday's close, the yield on 2-year U.S. Treasury bonds was 3.95%; the yield on 10-year U.S. Treasury bonds was 4.08%, up 45 basis points from last month's low; the yield on 30-year U.S. Treasury bonds rose slightly, closing at 4.39%, up 13 basis points month-on-month. As the anchor for global asset pricing, changes in the yield on 10-year U.S. Treasury bonds have a profound impact on the direction of various global assets."The recent rebound in US Treasury yields is a normal reaction to the overpricing of the premise of interest rate cuts. We do not believe that the 10-year US Treasury yield will remain above 4% for a long time during the US interest rate cut cycle. However, based on the nature of the US's preventive interest rate cuts, the space for US Treasury yield to decline is also limited," Wang Xinjie said. If the US economy, including labor data and inflation data, continues to exceed expectations unexpectedly, causing yields to remain high, then the continued strengthening of the US dollar will still influence the performance of global assets.
He continued to say that against the backdrop of US interest rate cuts, the Asia-Pacific stock market will see a significant marginal improvement, especially Chinese assets, which have formed a reversal trend under policy promotion. "In the medium and long term, against the background of a turnaround in sentiment, corporate profits, and economic growth expectations, Chinese assets have a high allocation value."
Divergent pace of interest rate cuts among Southeast Asian countries
From August to September this year, the central banks of the Philippines and Indonesia achieved interest rate cuts ahead of the Federal Reserve, becoming the first central banks in Southeast Asian countries to cut interest rates. However, in the past month, the currencies of these two countries have both experienced depreciation against the US dollar.
Wei Hongxu, a researcher at the Macroeconomic Research Center of Anbound Think Tank, analyzed to 21st Century Economic Report reporters that the depreciation of the Indonesian and Philippine currencies against the US dollar is influenced by central bank interest rate cuts, and of course, there is also the factor of the short-term strengthening of the US dollar.
Bai Wenxi said that due to the depreciation of the local currencies of Indonesia and the Philippines, this may have an adverse impact on exports, increase import inflation pressure, and thus affect the subsequent interest rate cut pace of these two countries, making central banks more cautious when considering interest rate cuts.
Wei Hongxu analyzed that for now, considering the economic situation and inflation data of the two countries, there is still an urgency for further interest rate cuts. Especially in Indonesia, although export growth has slowed down, it has always maintained a trade surplus, and the possibility of a significant depreciation of the currency is not great. Although changes in the Federal Reserve's pace will have an impact, the specific pace of interest rate cuts by central banks may be adjusted according to internal and external changes. However, in the context of the established interest rate cut cycle, such a trend will not change.
At present, central banks in Southeast Asian countries are standing at the threshold of the interest rate cut cycle, with varying urgencies for interest rate cuts. This month, the Bank of Thailand stated that it will consider interest rate cuts. Market surveys show that the Bank of Thailand may cut interest rates to 2.25% in the first quarter of 2025. Wei Hongxu said that Thailand may cut interest rates, on the one hand, because inflation continues to fall, reflecting a sluggish economy, and on the other hand, the Thai baht has continued to appreciate this year, affecting export trade. All of these are detrimental to the Thai economy, so Thailand does indeed need to consider adjusting monetary policy and increasing the intensity of easing.
The Bank of Korea cuts interest rates for the first time in four and a half years, and Korean stocks lack momentum
On October 11th, when the pressure to revive the sluggish economy outweighed concerns about household debt levels, the Bank of Korea (BOK) cut its benchmark interest rate by 25 basis points to 3.25%, achieving its first interest rate cut in more than four years.JPMorgan Chase's Chief South Korean Economist Park Seok Gil commented that the South Korean central bank's decision may be the beginning of a broader rate-cutting cycle.
Regarding the South Korean central bank's move to cut interest rates, Wang Xinjie stated that after the poor economic growth in the second quarter, the Korea Development Institute, the South Korean central bank, and several investment banks have revised downward their growth figures. This has also led to a negative market sentiment towards the economy over the past month. The South Korean central bank's stance may be more inclined to support growth from a financial stability perspective. Although exports, especially semiconductor exports, remain stable, weak domestic spending and investment have raised concerns about growth prospects.
The South Korean stock market has been volatile recently. From the data, the South Korean Composite Stock Price Index has fallen by about 11% from its peak in July. In response, Wang Xinjie believes that, coupled with the spread of negative sentiment in the stock market, especially foreign investors have sold South Korean stocks in the past few months, causing a decline in stock prices. He said, "We downgraded South Korean stocks to underweight because the weak demand for memory semiconductor chips has raised market concerns, leading to a lack of momentum in stock prices."
The Japanese stock market has also been frequently volatile. Barclays Bank research stated that last week the Japanese stock market saw a capital outflow of $9 billion, the largest single-week capital outflow in 20 years. Wang Xinjie still has a positive outlook on the Japanese stock market. Factors that are favorable to the Japanese stock market include increased stock buybacks, higher dividends, and Japanese personal savings accounts bringing capital inflows to Japan domestically, while strong cash savings provide significant potential for further capital inflows into Japanese stocks.
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