Fed's rate pivot seen driving outsized gain in Asian assets

Fed’s rate pivot seen driving outsized gain in Asian assets | Insurance Business Asia

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Fed’s rate pivot seen driving outsized gain in Asian assets

The rate cut provides greater insurance for a soft landing

Insurance News

By
Grant Funtila

The US Federal Reserve’s decision to cut interest rates is viewed as a positive development for Asian assets since many are under-owned and have better earnings prospects and more room to benefit from easing compared to their global counterparts.

According to money managers and strategists, the central bank’s 50-basis-point rate cut is less of a gloomy view of the US economy and more about providing greater insurance for a soft landing. This move is expected to help mitigate challenges facing Asian markets, like expensive valuations, increasing trade tensions, and more.

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

Following the announcement, an MSCI gauge of regional stocks rose by as much as 1.3%, with Japan’s Topix climbing over 2%, both outperforming the more subdued reaction of US shares on Wednesday. Asian currencies showed mixed results, although most, apart from Hong Kong’s, have strengthened over the past month. The yen weakened ahead of the Bank of Japan’s upcoming decision, and regional bonds also saw mixed movement despite a decline in Treasuries.

This rate cut is also accompanied by projections that indicate another 50 basis points of easing at the central bank’s remaining two meetings this year. While Fed Chair Jerome Powell warned against expecting more aggressive moves, the outcome provides Asian central banks with more confidence to implement their own easing measures without concerns over currency pressures.

The Fed’s preemptive step toward a soft landing by cutting rates “could boost risk appetite, driving capital inflows into emerging markets as investors seek higher returns,” said Manish Bhargava, CEO of Straits Investment Management in Singapore.

Corporate earnings growth in Asia is already outpacing the rest of the globe. According to Bloomberg data, 12-month forward earnings estimates for the MSCI EM Asia Index increased by 10% this year, compared to 8% for the MSCI World Index.

Thursday’s surge in Japanese shares was driven both by the Fed’s rate cut and the weakening yen.

For Japan, this was an ideal outcome as “a large rate cut was announced in the US as expected by the market, but the yen has not appreciated,” noted Rina Oshimo, a strategist at Okasan Securities Co. in Tokyo. She added that attention will likely shift to remarks from BOJ Governor Ueda after Friday’s policy decision, as the Bank of Japan is expected to hold its rates steady.

Asian policymakers had begun cutting rates in anticipation of the Fed’s move. In August, the Philippines reduced its benchmark rate, while Bank Indonesia started a rate cut earlier this week.

“A narrowing interest-rate gap and stabilizing capital flows provide a more comfortable backdrop for Asia’s policymakers and investors,” said Homin Lee, a macro strategist at Lombard Odier in Singapore. The Fed’s “decision marks the start of a meaningful easing cycle in the next 12 to 18 months,” he said.