US$ looks set to rule Asian equities
ASIAN equity markets are likely to take their cue in the months ahead from a strengthening greenback against most currencies, analysts said.
But they added that the reasons driving the United States dollar higher could be good news for Asian equities as they reflect a US economy that is moving to a more solid footing.
The greenback is set to keep rising after last week's move by the US Federal Reserve to tighten monetary policy and its expected raising of interest rates next year.
Vasu Menon, vice-president, Wealth Management Singapore, OCBC Bank, urged investors to look at the big picture.
"The reason why rates are rising is because US economic fundamentals are getting stronger. The markets so far have been driven by liquidity but going forward, the focus will be more on growth and earnings, which is sustainable for equities markets,'' he said.
"The volatility before and after the rate hike should not be something investors are too worried about because that creates opportunities for them to buy into equities," he added.
Kelvin Tay, regional chief investment officer, Southern APAC, UBS Wealth Management, also believed the US dollar is a key issue to watch.
"What we believe is likely to be a more pertinent issue for Asian markets over the next 12 months is the strength of the US dollar.
"This has implications for the trend of Asian equities over the next 12 months. Why? The US dollar strength, as reflected in a strengthening USD index, has historically had a high inverse correlation with Asia ex-Japan equities."
He added: "The US financial institutions manage US$70 trillion in assets, of which about a quarter of their equity and bond exposure is in foreign holdings. Therefore, whenever the US institutions reduce or increase their foreign equity or bond exposure, they have an overarching influence on the direction of the US dollar."
The diversification away from US assets appears to have peaked, especially for equities, he noted.
With US interest rates set to rise, US reserve managers have little incentive to diversify away from the US dollar.
And an acceleration of the US recovery is likely to encourage US asset managers to repatriate their capital back into US equities, thus providing further impetus for the dollar to strengthen, he said.
Mr Menon said investors should stay invested in stocks, particularly global equity funds with a greater weightage towards developed markets, as growth will likely be driven by those markets.
"Even though rates are expected to rise, opportunities are likely in Japan, the US and Europe as the central banks in those countries are still adopting accommodative monetary policies," he said. "It really depends on how the US recovery pans out. If the labour market has not completely recovered, the Fed may not be that aggressive in raising interest rates."
While real estate investment trusts (Reits) are vulnerable to rate increases, they are attractive for now as they still offer relatively good dividend yields, as long as rates don't rise too significantly or too fast, analysts said.
Just don't go overweight on them, Voyage Research analyst Ng Kian Teck advised. "Even with the change in tone from the Fed, we haven't seen very much fluctuation in Reit prices. It seems like people have already priced in expectations of a rate hike next year. Moreover, Europe and Japan are still doing their own form of monetary easing, so that could cap the increase in rates," he said.
CIMB economist Song Seng Wun said that interest rates are likely to remain low because the US rate normalisation policy may depend on whether Japan's and China's recovery pick up.
"The US recovery may be derailed should global economies show signs of weaker growth. And given current low energy prices, inflation could weaken or remain low worldwide, which reduces the need to raise rates."