The direction of the dollar, which has surged since the US presidential election, will determine the outlook for Asian equities in the near to medium term, the head of emerging at JPMorgan Asset Management said.
The dollar rose to a one-year high against a basket of currencies on expectations US interest rates will rise faster than previously anticipated if President-elect Donald Trump cuts taxes and boosts infrastructure spending.
“The first thing we need to focus on is has the direction of the dollar changed because of the change in the administration,” Richard Titherington, who is also head of Asia Pacific Equities team, told the Reuters Global Investment Outlook Summit.
“Investors had been assuming that the dollar had peaked. If that assumption turns out to be wrong ... that does change the landscape quite dramatically and in general terms you would normally think that a rising dollar is a negative for emerging markets and Asian equities.”
MSCI’s broadest index of Asia-Pacific shares outside Japan ended flat on Wednesday having touched a four-month low touched earlier this week. The index is down more than 4 percent since Nov. 8.
Sharp gains in US bond yields have drawn investors to the dollar, and the dollar index is just 0.5 percent away from its highest in more than 13-1/2 years. The strength has fanned fears funds are shifting to the US from emerging markets.
The Chinese yuan, on the other hand, weakened to 6.8703 to the dollar, its lowest level since December 2008.
There was no investor panic because of the weaker yuan as the depreciation in the currency was backed by a stabilization in the world’s second-largest economy, Titherington said at the summit in Hong Kong.
“The Chinese authorities have managed to engineer a currency adjustment without creating concerns that there is capital flight going on, which is a positive,” he said, adding that the yuan would weaken further if the dollar continues to strengthen.
Within Asia, Titherington said he was bullish on the long-term prospects for Indian and Vietnamese equity markets.
He said, however, that India could see a negative impact in the short term due to Prime Minister Narendra Modi’s order to withdraw large denomination banknotes from circulation in a shock “demonetization” drive to fight tax evasion, corruption and forgery.
“Is the sell-off that you’ve seen in the equities over the last week, is that an opportunity or is it the market telling you this currency reform is going to cause significant problems for a long period of time?,” he said, referring to the withdrawal of some bank notes.
“I will tend to be optimistic ... certainly the government in India is taking a very big risk which I think is a long-term positive.”

Source: Arab News