AxJ Equities 2Q19: Beneficiary of dovish Fed

Asian governments have policy flexibility, given the Fed’s dovishness
Chief Investment Office03 May 2019
Photo credit: AFP Photo

After a weak 2018 with a loss of 14%, Asia ex-Japan equities bounced back strongly in 1Q19. Despite the recent rebound, valuations remain undemanding at 12.9x forward P/E – slightly below their 10-year historical average. With the US Federal Reserve now taking a patient approach in its rate hikes, USD’s rally could be more muted. Further, the threat of oil-led inflation has been receding. In light of the economic slowdown in China, the government is likely to add more stimulus to the economy. Based on cash levels, Asia still appears relatively under-owned. Thus, we are optimistic on Asia equities over 2Q19.

A gentler USD rise could prove beneficial for Asia equities: With the Fed now taking a patient and gradual mode in its rate-hike decisions in light of muted inflation data, market participants are not pricing in any rate hike for 2019. Besides this latest dovish tilt, the Fed has also shown that it is now market-sensitive and not just data-dependent. The current Fed Funds rate is now considered to be closer to a “neutral” level. A more patient Fed and a more benign USD backdrop later this year could underpin Asia ex-Japan equities over the coming months.At the start of 1Q19, we advised investors to stay the course on US equities despite the acute selldown in December 2018. Our rationale back then was:


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