Unstoppable dollar risks worsening $71 billion Asia stock exodus

The dollar's relentless rise is threatening to trigger more outflows from Asia's emerging-market shares, spoiling hopes of the region making a comeback in the second half.

A gauge of Asian currencies has slumped to its lowest in more than two years, an ominous sign for equities given their strong relationship with moves in foreign exchange. The MSCI Asia ex-Japan Index has fallen 20% as foreign investors took $71 billion out of stock markets in emerging Asia outside China so far this year, already double the outflows in 2021.

The dollar has steamrolled through global currency markets lately, benefiting from bets on aggressive Federal Reserve rate hikes. A stronger greenback bodes ill for Asian stocks when it signals lower risk appetite and is also seen as negative for growth in emerging economies, many of which rely on imports priced in the currency.

"The dollar is strengthening because there's risk aversion rather than growth" and that's "not a good mix" for Asian assets, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.

Vulnerable spots

Asia's tech-heavy markets like South Korea and Taiwan look particularly vulnerable as higher global bond yields and recessionary headwinds are hurting valuations and the demand outlook.

Stock benchmarks in the two nations are among the worst performers in the region this year and foreigners have net sold a combined $50 billion of their shares.

Get out

For less export-reliant markets, weaker local currencies worsen national balance sheets and company profit margins, as both corporate and sovereign borrowers suffer from higher repayments on dollar-denominated debt.

In India, one of the world's biggest oil importers, the rupee has tumbled to a record low as the nation faces widening current-account and fiscal deficits. Meanwhile, the hands-off approach by Thailand's monetary authority has resulted in a slump in the baht, one of the big decliners in EM currencies this year. Further currency weakness could threaten the resilience their stock markets have shown in 2022.

Chinese stocks, which saw a slew of bullish calls in June, have taken a sharp turn lower this month, adding to Asia's woes. A key gauge of shares listed in Hong Kong is down more than 9% amid renewed Covid concerns, an intensifying property crisis and fresh regulatory scrutiny of the tech sector.

For Siddharth Singhai, chief investment officer at New York-based hedge fund Ironhold Capital, sometimes it doesn't take much for a trickle in foreign outflows to turn into a flood.

"Foreign investors are very fickle. They tend to move in and out very quickly," he said.

Asia's infrastructure, home building and construction stocks will be more impacted by a stronger dollar given their sensitivity to interest rates, he added.

The Bloomberg JPMorgan Asia Dollar Index has slumped 6% so far this year, on track for its worst annual loss since the region's financial crisis in 1997.

Sector bets

All 10 sectors in the Asia ex-Japan index are in the red this year.

For those seeking to pick up some beaten-down shares, Taiwanese telecoms and consumer staples stocks, Indian IT firms, Korean health-care names and Malaysian energy stocks were consistent outperformers during similar periods of depreciating Asian currencies in the past decade, according to a study by BNP Paribas Securities analysts last year.

"From a flows and sentiment perspective, yes Asian stocks tend to underperform in the short term against a rising dollar," said Christina Woon, investment director for Asia equities at abrdn plc. But "you can also find a number of beneficiaries, such as exporters, or companies that have more domestically focused tailwinds where a stronger dollar is less of an issue."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.