Lower US rates a boon for Asia and EM
The recent market turbulence is taking place during the “silly season” with crowded trades punished significantly. Unsurprisingly, AI and information technology stocks have been hit hard. This has impacted our Asian portfolios materially, but we do not intend to join the panic.
A weak payroll release last Friday unnerved markets globally. The headline increase of only 114,000 in July was the second lowest since December 2020 when nonfarm payrolls declined by 243,000. Hiring by the government, healthcare and social assistance services accounted for 81,000, 71% of the total with ‘other sectors’ (i.e. the private sector) accounting for just 33,000. Intel’s dreadful 2Q earning release last Friday, announcing a 15% reduction in the workforce (some 17,000 jobs) simply poured further fuel on the fire. Intel’s stock price is down 57% year to date while rumours that Nvidia’s AI chips are facing production delays of up to three months is a further negative.
The VIX Index, a measure of volatility, spiked over 100% yesterday. The fundamental fear is that the Fed is now behind the curve with its full employment mandate. The same trend is reflected in wage data. Average hourly earnings slowed from 3.8% in June to 3.6% in July, the lowest level since May 2021. The 10-year US Treasury yield yesterday fell to this year’s lows, down almost 100bps since peaking on April 27th to a low of 3.75%. The last 50bps occurred in just seven trading days!
At time of writing, money markets are discounting circa 110bps of easing by the end of this year. We also note that the US Dollar Index (DXY) is now over 10% below the September 2022 high. A weaker dollar and falling short term interest rates are unambiguously bullish for Asian ex Japan equities. The regional equity index is now over 10% off recent highs and sits a whopping 36% below the February 2021 highs, some normalcy has returned this morning, however.
Trying to catch a falling knife is a hazardous pursuit but it hard to argue that, on a middle-teens earnings multiple, Asian equities are anything other than a strong buy at present.
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