Global Investors Plow Cash Into Asian Stocks as Year-End Nears
Investor Appetite Undiminished by Recent Gains, Risk of Higher U.S. Interest Rates
Surprise moves in recent weeks by central banks in China and Japan to ease monetary policy have added to stimulus from Europe—and expectations for more—and are underpinning the resurgence in appetite for stocks in the region. The Shanghai stock market traded at more than a three-year high Wednesday, ending the day up 1.4% at 2604.35. It was the first closing level above 2600 since August 2011.
The flow of cash faltered in late summer and early fall, but the tide is surging again across emerging markets, including those in Asia, an indication that investors have been more willing to take on risk.
Stock investors put a net $6.3 billion into Asian emerging markets from the beginning of the month through Nov. 25, after taking out a net $2.4 billion in October, according to the Institute of International Finance, an industry group. The inflows this month are comparable with buying levels in the middle of the year.
But analysts at IIF say the market could be underestimating how quickly the U.S. Federal Reserve will tighten monetary policy, including the timing of its first increase in interest rates since before the financial crisis. The Fed has been saying since last year that short-term rates would stay near zero for a “considerable time” after the end of its latest bond-buying program, which wrapped up last month.
The fear is that higher yields in the U.S. could reduce the flow of capital into riskier economies, although fund managers aren’t expecting as big a selloff as in the spring of 2013, when the U.S. central bank first indicated it would start to scale back its bond purchases.
A similar situation to June 2004, the last time the Fed initiated a series of interest-rate increases, could emerge next year, said HSBC equity strategist Devendra Joshi. Price/earnings multiples in Asia, a measure of how expensive stocks are, fell six months before the rate increase, and valuations took more than two years to recover.
An MSCI index of stock performance in Asia, excluding Japan, is up 3.9% year to date, on par with a 3.5% gain last year but underperforming the S&P 500’s 11.8% rise.
Despite the risks, the easier money policies from central banks in Asia will provide another “marginally positive impact” on the market, adding to the current “immediate impact” from the announcements, noted BNP ’s Mr. Leenders.
The Shanghai Composite Index, which had a bull run—a rise of 20% or more—from January through October, has added 7.6% this month, with the help of the People’s Bank of China’s announcement last Friday that it will cut borrowing rates for the first time in two years.
Shares had rallied since April, when Beijing unveiled a trading program, launched this month, that allows foreign investors to buy Shanghai-listed stocks via Hong Kong.
In Japan, the Nikkei Stock Average is up nearly 6% this month, partly because the Bank of Japan announced an expansion of its monetary stimulus on Oct. 31. Foreign investors bought a net $10.7 billion of Japanese stocks from the beginning of the month to Nov. 24, helping lead a resurgence in the flow of money to Asia, according to HSBC data. The country saw $3.7 billion of net outflows in the previous month.
“There is a bit of a tug of war in terms of monetary policy,” meaning that money flows into Asia will likely be volatile in the short term, said HSBC’s Mr. Joshi.