Who will be severely hit?
According to CIMB, it expects Asia to suffer from more widespread capital withdrawal, a further rise in volatility and from some spillover selling pressures into markets which are not under external funding or domestic growth pressures in coming months. However, financial contagion risks should prove unfounded.
The past 24 hours have seen a crisis of confidence envelop Asian financial markets. What started off as a relatively contained sell down
in the high current account deficit economies of Indonesia and India is now having negative ripple effects throughout the region as financial contagion fears rise.
We think these fears will ultimately prove overdone with Asia’s economic fundamentals much stronger than in prior crisis periods (1997/98 and 2008/09) and backed by a better regulated financial sector.
However, these concerns add to already elevated volatility levels and raise potential selling (redemption) pressures in markets which are not subject to external funding pressures and/or deteriorating growth momentum.
Thus, even if recent currency weakness and capital flight concerns are contained there will be spillover selling pressures as policy normalization begins and the immunity premium in “less vulnerable” Asian markets shrinks.
What is different for Asia?
Asia’s economic fundamentals are much stronger than in prior crisis periods (1997/98 and 2008/09) and are backed by a more stable and better regulated financial sector.
Solid fundamentals and stable domestic growth drivers should help to keep up a steady inflow of capital – although this will be less buoyant than in the absence of monetary exit.
Indonesia and India are fast becoming priced for the risk of persistent growth weakness and capital flight. However, they are still not cheap.
A key question is not how far markets have fallen or where valuations lie but whether they are cheap enough to absorb further economic and earnings disappointment. We doubt it and stay
Underweight. For the rest of the Asian markets, recent developments should not have large negative economic impacts, but markets will find it tough to overlook rising headwinds. Buckle down for the next few months – the ride just got bumpier!
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