Tue, Mar 26, 2019 – 5:50 AM
ASIAN markets witnessed a bloodbath on Monday, as worries of a global growth slowdown grew but there was no reason to worry, just yet.
The selloff was triggered by US equity indices taking hits last Friday on weak purchasing managers index (PMI) data from Europe and the US. This led to an inversion of US three-month and 10-year treasury yield spreads – generally viewed as a signal foreshowing recession – for the first time since 2007.
On Wall Street, the Dow Jones index recovered from Friday’s sell-off and remained in the black Monday noon New York time.
Market experts were not surprised by the Asian retreat. Bank of Singapore’s head of investment strategy, Eli Lee said: “With alarm bells from the inversion and renewed doubts over global growth, it is not surprising to see equities pulling back sharply. He added that equities are vulnerable to a pullback “given the extended rally this year which has aggressively front-run a positive Sino-US trade deal”.
Markets in Japan dropped 3 per cent, and Hong Kong and China were both 2 per cent lower. Even Thailand, where observers are bullish on a pro-business government, saw its blue-chip index dip 1.2 per cent.
That said, Mr Lee and UBS Global Wealth Management’s regional chief investment officer Kelvin Tay say there’s no need to panic over inversion. Mr Lee explained: “Besides the weak growth outlook, there are other factors pressuring the longer end of the yield curve, such as ultra-low interest rates in Europe and Japan, negative term premiums, persistently weak inflation, and the Fed’s dovish about-turn and re-thinking of its inflation targeting framework.”
“We need to put things into perspective as that there has generally been a secular decline in long-term interest rates and in such an environment it’s more natural for yield curves to be somewhat flatter than historically was the case,” Mr Tay said.
While a mildly inverted yield curve is not as strong of a recession signal than in previous cycles, Mr Tay added that it still has negative implications on banks’ profitability. As such, “it’s not surprising that the markets have reacted negatively” as banks are a major component of equity benchmarks.
Monday’s market performance also suggests a return to higher volatility levels which were absent for most of the year. DBS Group Research’s regional equity strategist, Joanne Goh, does not think “the spike in volatility will stop at current levels considering the near-term risk events”.
Such events include the UK’s potentially messy divorce from the European Union (EU), the failure of the US-China trade deal, and corporate earnings downgrades.
Thus, Ms Goh suggests that investors would benefit from being cautious after a decent first quarter for Asian markets as “we are likely to go though a soft data patch”.
But she believes the outlook for the second half onwards is brighter as “Asian markets will have more upside potential in the second half after the worst of the economic growth scare is over.”
Societe Generale’s head of Asia equity strategy, Frank Benzimra, is less optimistic on the mid term.
He sees “a reasonably positive outlook on equities in the next couple of months and a descend sometimes in the second half”. “This scenario of a cautious second half is consistent with a US recession sometime in the first half of 2020 given equity market correlations and equities leading a recession by 6-9 months.”
Bank of Singapore’s Mr Lee said that notwithstanding the uncertain global growth outlook, “it is premature, in our view, to call for the end of the bull market”.
Mr Tay said that at the end of the day, whether or not markets see a selloff will likely be dependent on four key issues.
They boil down to the Fed maintaining its recent dovish shift, an amicable resolution to US-China trade war, global growth momentum improving in the second half of 2019 or as soon as Q2, and whether the UK exits orderly from the EU.