Can Asia weather tightening binge?

SINGAPORE: Asia’s emerging economies are better placed than most other regions to weather a bout of turbocharged US policy tightening, analysts say, but with a health warning that investors shouldn’t rush in.

The Federal Reserve last week raised interest rates by 75 basis points, the largest hike since 1994, and flagged further steep increases for the rest of the year to curb surging inflation.

In contrast, only hours earlier China’s central bank kept rates unchanged for a fifth straight month.

Foreign investors have been pulling money out of emerging Asia, excluding China, for five months, worried about inflation and a reluctance to raise rates in the face of slowing global growth.

Now Asia is under pressure to tighten and the next few weeks could be volatile, says Galvin Chia, an emerging markets strategist at NatWest Markets.

Kerry Craig, a strategist at JP Morgan Asset Management, noted that Asian economies have more support from currentaccount surpluses and stable currencies than in previous periods when Fed rate hikes sucked money out of emerging markets.

Local markets have sold off this year, though the moves have been far gentler than the violent outflows seen in US tightening cycles in 2016 and 2004. “But we’re still very cautious and neutral in terms of asset allocations, we’re not saying, ‘Run out and buy these things now,’” Craig said.

“We’re just saying that they are becoming more appealing, with thinking about where to find growth in portfolios.”

China remains a wild card, amid questions about how fast the lockdown-battered economy will recover. Economists say the People’s Bank of China now has only limited room to ease, given the aggressive Fed and Beijing’s wariness of debt bubbles.

Divergent Sino-US policies have wiped out China’s yield advantage, triggering a record monthly tumble in the yuan in April as capital left. The Chinese currency has since stabilised.

How other Asia central banks react to their domestic inflationary stresses is crucial. An aggressive Fed will put pressure on Asia to “raise rates, partially because of increased risk of capital outflows and weaker currencies”, said Rob Subbaraman, head of global macro research at Nomura.

“But also I think many of the Asian economies are now facing their own inflation pressures irrespective of the Fed.”