Analysis: Asia's post-September market rally runs out of gas

Mon Nov 4, 2013 4:03pm EST
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By Vidya Ranganathan

SINGAPORE (Reuters) - Investors' appetite for emerging Asia stocks, bonds and currencies is spent, and for reasons that go beyond the overriding question of when and how the U.S. Federal Reserve will reverse its loose policies.

Dissatisfied with the economic recovery in the region, disappointed with corporate earnings and worried that currencies have little room to rally further, investors seem to be abandoning the rally that was spurred in mid-September by the Fed's decision not to start tapering its stimulus.

"We need to see much stronger export growth in emerging markets," wrote UBS strategist Bhanu Baweja, adding that was a precondition to achieving better earnings growth as well as improvements in regional current account balances.

That leaves most Asian markets well below their highs for the year, struck in May. Indonesia's rupiah is 14 percent weaker than its May high, while the Philippine stock market .PSI is about 12 percent below the May peak.

Part of the reason why the rally petered out is justifiably owing to the Fed. Markets surged after September 18, when the Fed held back from cutting its massive asset purchase program, but investors know it's only a matter of time, and data, before five years of easy U.S. monetary policy is wound back.

Fed funds futures have adjusted to price in a delayed and slower pace of policy tightening, but the tightening is coming and bond prices would have to factor that in, said Sameer Goel, head of rates and currency research at Deutsche Bank.

"We are still looking at a process of repricing in the cost of money globally," Goel said.

That would warrant some amount of a risk-premium being built into financial assets, but the risk premium currently priced into Asian markets speaks of other concerns.   Continued...

A woman holds Indonesian rupiah banknotes in front of a Bank Indonesia mobile bank in Jakarta July 15, 2013. REUTERS/Beawiharta