Why are Asian markets suddenly looking a bit wobbly?
Morgan Stanley macro strategy analyst Rashique Rahman discusses some of what’s going on.
The bottom line: the big economic we comeback is slowing down:
Upside macro fundamentals momentum looks to be stalling for EM, following a sharp
improvement since early 2009. We gauge this with our Macro-Dynamic Trend
Indicator (MDTI). It measures the rate of change in key macro variables*.
Market momentum tends to follow trends in the MDTI, with a lag –suggesting that
there is still some upside resistance to asset prices in the coming weeks. We show
the MDTI against EM sovereign credit spread levels (Exhibit 1). Notwithstanding a
near-term market rebound from the recent pullback –which we expect –this is
consistent with our view of a correction in early 2Q.
First, on current trends MDTI would be falling into 2Q. Second, this would occur at a
time of what we believe may be reduced fund inflows in 2Q, providing less underlying
technical support to the market. Investor exposure to the market has already
increased. There is scope to add more long-side risk, but the technical position is
nowhere near as sound as it was at the end of last year.
Third, we anticipate a sharp rise in long-end US rates, which would crowd out other investment.
We combine the MDTI with our EM exposure indicator (EMEI) to gauge the
combination of fundamental and technical momentum on market direction. This EM
gravity index looks to have peaked and has declined, heading towards a downside
bias for the market (Exhibit 2). Arguably, the recent sell-off has taken lots of steam
out of any future correction, but these fundamental and technical dynamics could still
prove to be a drag on market performance in the coming weeks.
What is contributing to the peaking out in the MDTI? From a regional perspective,
non-Japan Asia (AXJ) is showing a decisive decline in fundamentals momentum, led
by higher inflation and a deterioration in trade balances. The other two regions’
macro momentum remain steady to higher, with particular strengthseen in Latin
America for Colombia and Mexico and for CEEMEA, Poland and Russia.