Worst Asia stock slump in over a year

by BLOOMBERG / graphic by MZUKRI MOHAMAD

TOKYO • Asian stocks are falling further behind their global peers, buffeted by a resurgence of Covid-19 cases across the region and mounting investor concern over inflation.

The MSCI Asia Pacific Index slumped 3.2% last week, and is now down 2.7% in May. That’s put the gauge on track for its worst monthly performance since March 2020 — when markets took the biggest hit from the pandemic.

The regional benchmark is also trailing MSCI’s broadest measure of global equities for a fourth straight month, and market watchers are citing several reasons why this underperformance may continue.

While inflation has emerged as the most immediate concern for equity investors worldwide, confidence in Asia has also been hit due to a worsening Covid-19 outbreak from Taiwan to Singapore. Earnings upgrade are slowing and valuations still remain relatively high in some growth sectors, analysts said.

“The sentiment now is definitely not positive,” said Banny Lam, head of research at CEB International Inv Corp. “Asian stocks are swayed by the inflation in the US. People are very worried that the US will start to roll back stimulus earlier than expected.”

The worst of last week’s sell-off came after data last Wednesday showed US consumer prices climbed in April by the most since 2009. The MSCI Asia Pacific Index slumped 1.8% last Thursday.

The virus remains the other major sore point for Asian investors. Singapore, one of Asia’s top-performing markets this year, saw its stock benchmark plunge as much as 3.2% last Friday, the most in the region, as the city-state said it will return to the lockdown-like conditions it last imposed a year ago to contain a rising number of untraceable infections.

At the same time, India, Japan and other parts of South-East Asia are also batting a fresh surge in cases and tightening restrictions, with relatively slow vaccine rollouts and delays in reopening borders compounding concerns for investors.

“You have to have a strong vaccination programme in order to open up and rejoin the rest of the world and keep the virus at bay,” said Mark Matthews, head of Asia research with Bank Julius Baer & Co.

“Unfortunately, most of Asia has not had very strong vaccination programme.”

Having led global equity gains in 2020, Asia is sharply underperforming peers in the US and Europe in 2021. While the Asian benchmark is now little changed for this year, the S&P 500 Index and the Stoxx 600 Index are both up about 11%.

Seasonality also seems to have played a role in the recent sell-off. May has historically been the worst month for the MSCI Asia Pacific Index, with the benchmark averaging a 2% decline over the past 10 years, according to data compiled by Bloomberg.

While companies across Asia were early beneficiaries when it came to the pandemic recovery after strict lockdowns at the start of 2020, those gains have largely been priced in.

Twelve-month earnings estimate for the Asia-Pacific gauge have been raised 11% this year by analysts, according to Bloomberg data. That’s compared to 17% in the US.

Inflation fears may pick up over the next few months as US demand for services accelerates over the summer, according to Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo.

“Once the inflation pickup slows pace, markets could calm down,” he said. As new Covid-19 outbreaks across Asia add uncertainty to the pace of the demand recovery, Tai Hui, chief Asia market strategist at JPMorgan Asset Management, points to the low correlation between Chinese and global stocks.

“The Chinese onshore market’s low correlation with international equities could be a blessing in disguise in this choppy environment,” Hui wrote in an email.