Sep 19, 2016

    Worries over Fed, BoJ cause stock sell-off

    REGIONAL equities have been acting up all week due to incessant speculation over whether the US Federal Reserve will raise interest rates at its next meeting, which starts tomorrow, while uncertainty over the Bank of Japan's monetary policy stance is unnerving investors.

    The uneasiness was reflected in The Straits Times Index's (STI) 1.6 per cent slide over the past five sessions on thin trading, compared with the week before.

    Japan's Nikkei lost 2.6 per cent over the same period, and MSCI Asia ex-Japan - the region-wide indicator - pared over 2 per cent.

    All this unfolded even as market expectations have effectively ruled out a September Fed hike, with traders in the United States giving that decision only around 12 per cent to 15 per cent probability, according to Fed Fund futures prices monitored by derivatives platform CME.

    Regardless, investors will do well to keep in mind that the dynamic between the US rates and Asian equity markets is not straightforward.

    One thing to note is that the recent steepening of the US Treasury yield curve may be a hurdle for regional shares, some market watchers have warned.

    A yield curve tracks the yield of bonds through maturity dates. A steeper curve means the yield of long-term debt has shot up, usually because of lower bond prices due to a sell-off.

    Last week, the US bond yield curve hit its steepest in four months. Investors are selling their long-term US debt in favour of short-dated ones as an imminent Fed hike looks unlikely.

    "Higher US bond yields and a steeper yield curve could pour some cold water over Asian credit and - in the light of the high correlation between Asian credit and regional equities - Asian stock markets," the HSBC global research team said last week.

    The slew of market risks amid the complex network of global money markets points to a need to avoid knee-jerk investment decisions, and to focus on either long-term structural themes or at least the shelter of high-dividend stocks.

    In terms of dividend, Hutchison Port Holdings Trust on the STI easily stands out with a yield of around 8.9 per cent, among the highest in Asia. It last closed at 43.5 US cents, with a price-to-earnings ratio of 15.