US Federal Reserve rate pivot expected to drive outsized gains in Asian assets

ASIAN assets could have better earnings prospects and more room to benefit from easing than their global peers, after the US Federal Reserve’s shift to interest rate cuts.

The central bank’s decision to lower its benchmark by 50 basis points is less of a gloomy view about the US economy and more about providing greater insurance for a soft landing, money managers and strategists said.

They added that the pivot will help offset many of the negatives facing Asian assets such as expensive valuations, China’s slowdown and growing trade tensions.

“The rate cut gives a clear signal to the financial markets, industrialists and householders that the Fed is supporting growth,” said Gary Dugan, chief executive officer at the Global CIO Office. “The Fed’s action should be taken very positively by Asian markets.”

Asian assets largely welcomed the US central bank’s decision from the start of trade on Thursday (Sep 19).

An MSCI gauge of regional stocks climbed as much as 1.3 per cent, while Japan’s Tokyo Stock Price Index jumped more than 2 per cent. Both outperformed the muted reaction of US shares on Wednesday.

Asian currencies were mixed, with all except Hong Kong’s strengthening over the past month. The yen weakened as traders awaited a Bank of Japan (BOJ) decision on Friday. Most regional bonds were mixed even as US Treasuries fell.

The Fed’s first rate cut in more than four years was accompanied by new quarterly projections that indicated an additional 50 basis points of easing is expected over its remaining two meetings this year.

While Federal Reserve chair Jerome Powell cautioned against assuming there would be further outsized moves, the outcome means Asian central banks have more confidence to ease without worrying about currency pressures.

The Fed’s pre-emptive step to increase the likelihood of achieving a soft landing by lowering interest rates “could boost risk appetite, driving capital inflows into emerging markets as investors seek higher returns”, said Manish Bhargava, chief executive officer at Straits Investment Management.

Corporate earnings growth in Asia is already outpacing the rest of the world. The 12-month forward earnings estimates for the MSCI Emerging Markets Asia Index have risen 10 per cent this year, compared with 8 per cent for the MSCI World Index, indicated Bloomberg data.

Eastspring Investments, a unit of Prudential, is among those saying Asian assets will benefit from the Fed’s shift more than assets from other regions.

US rate cuts followed by a weak dollar is usually positive for Asian and emerging markets, where earnings are growing at a faster clip than the developed world, it said.

“Compared to US equities, Asian and emerging-market equities are attractively valued and offer diversification against the US.”

The jump in Japanese shares on Thursday was driven by the Fed rate cut and also the weaker yen.

For Japan, it was probably the ideal outcome that “a large rate cut was announced in the US as expected by the market, but the yen has not appreciated”, said Rina Oshimo, a strategist at Okasan Securities.

“Since the BOJ meeting is expected to remain unchanged, attention is likely to focus on its governor Ueda’s subsequent remarks,” she said.

Policymakers in a number of Asian countries cut rates in anticipation of the Fed’s move. Those in the Philippines lowered their benchmark in August, while Bank Indonesia surprised investors by doing so on Wednesday.

“A narrowing interest-rate gap and stabilising capital flows provide a more comfortable backdrop for Asia’s policymakers and investors,” said Homin Lee, a macro strategist at Lombard Odier.

The US central bank’s “decision marks the start of a meaningful easing cycle in next 12 to 18 months”, he said. BLOOMBERG