ANY NEGATIVE market reaction to a scaling-back by the Federal Reserve of its bond-buying program should be short-lived, with the impact on Asian markets expected to be minimal, according to Nomura Holdings, Inc.
Asian markets are in a much stronger position now to withstand volatility in case there is a repeat of the “taper tantrum” of 2013, Chetan Seth, an equity strategist for Asia-Pacific at Nomura, said during an investment forum organized by the bank Tuesday.
“Discussions around tapering will probably gain forward (momentum) over the course of the next few months. That could be a source of volatility in the market but in our view, as far as Asian markets are concerned, if you see a negative market reaction because investors are looking at the 2013 template and start selling stocks, we think that reaction should be short-lived,” Mr. Seth said.
In 2013 the markets responded negatively when the Fed signaled plans to roll back quantitative easing. Expectations of rising rates in markets deemed safe led to sharp outflows from emerging markets and forced central banks to hike their own interest rates.
“Tapering means the Fed will still buy bonds, it’s not that the Fed will stop cutting back on the balance sheet size, they will still buy bonds, it’s just that they will buy less… and the market will probably take that view. Any negative reaction to tapering will be short-lived,” he added.
Mr. Seth said the Fed will likely start discussing in the next few months its plan to scale back bond purchases.
While the Fed is expected to remain accommodative, he said Asian economies are also in a better position with stronger fundamentals currently than they were in 2013 when the “taper tantrum” happened, hitting India and Indonesia hard.
He said the resurgence of coronavirus cases and the possibility that the trend will continue over the short term pose the main risk to equity markets in the region. Faster roll out of vaccination programs in the second half could mitigate the risk, he said.
“(Investors were cautious) in Asia because the region has lagged on vaccine rollout. (However, there are) expectations that vaccine rollout will accelerate specifically, in the north Asia part which includes China, Korea, Hong Kong and Taiwan,” he said.
Resilient earnings among listed companies in the region, as observed last year, could also offset the risks brought about by the rising infections.
He said the fundamentals of Asian stocks remain able to withstand other near-term risk from tapering or of increasing bond yields and inflation.
He said the Fed is expected to remain accommodative to help the labor market recover.
Nomura expects earnings of listed Asian companies to increase by 7-9% over the next few years, which will also support stock prices.
He also noted global financial markets are flush with liquidity but only a small part of it is going to Asian markets.
“We think there’s a lot of money on the sidelines, waiting to be deployed in Asia. The simple reason is very strong retail flows have essentially crowded out foreign investors, so if you see a bit of weakness and better valuation in Asia stocks, I think you will see some money come back to Asia,” he added. — Beatrice M. Laforga