Analysis: QE talk spurs caution in Asian markets, yet money stays

Fri May 31, 2013 12:46am EDT
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By Vidya Ranganathan

SINGAPORE (Reuters) - Heads we buy Asia, tails we don't sell.

That is the choice investors in Asian markets are making in the face of what would be the biggest inflection point for markets since the 2008 financial crisis, the prospect of U.S. super-loose monetary policy being reined in soon.

Since it was cheap Fed funds that fuelled the rally of the past four years in emerging stocks, bonds and currencies, most investors had reasonably assumed that a tapering off in the U.S. stimulus program would see funds flow out of emerging markets.

But Asian flow data suggests the contrary. Portfolio money is still pouring into Asia, driven by hope the Fed will tighten policy at a modest pace and only when the U.S. economy is strong enough to lift global growth.

"We're not really seeing people switching out of Asia," said Guy Steer, head of research with Society Generale in Hong Kong. "So far, we haven't seen people switching money even within the region."

There are no major signs investors are shifting positions, barring some hedging of the risk that the Fed eventually reduces the $85 billion it provides each month through bond purchases.

Analysts recommend 'defensive' trades, such as buying protection in currencies that would suffer against dollar strength, such as the Indonesian rupiah and South Korean won. Forward markets in these currencies have moved in line with those hedging flows.

"The fact that people are being a lot more proactive in hedging their currency risk shows that the market is now starting to think about the dollar in a different manner," said Mirza Baig, head of currency and rates strategy at BNP Paribas in Singapore.   Continued...

A woman wearing a kimono holds an umbrella as she walks past an electronic stock quotation board outside a brokerage in Tokyo May 23, 2013. REUTERS/Toru Hanai