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2022 turned out to be an annus horribilis for Asian equities as an uber-hawkish Fed and unrelenting dollar strength triggered the worst bloodbath in regional stock markets since 2008.

Foreign investors pulled more money out of emerging Asia last year than any year since the great crash 14 years ago, pushing MSCI’s Asia index down 19.4 percent – its biggest fall since dropping 43.3pc in 2008 – and wiping out nearly $5 trillion in valuation.

Quoting data from stock exchanges, Reuters reported as new year trading started that foreign investors routed about $57 billion from Taiwan, India, the Philippines, Vietnam, Thailand, Indonesia and South Korea to more appealing dollar assets.

Interestingly, though, contrarian investors have already started wondering out loud if bottom fishing in Asia, especially around Q2 of the new year, might be a good idea. Some are “betting some of the biggest bugbears of last year will evolve into tailwinds for 2023”, Bloomberg said on 3 January 2023.

However, regional markets still reeling from 2022 and desperate for a better 2023 will take this optimism with a lot of caution. Because a lot of pieces will have to fall in the right places for the carry trade towards high interest rates of the US to unwind and foreign investors to bring some of those billions in hot money back to Asia.

One, the dollar must behave itself. Among the many surprises of last year was also the greenback’s decoupling from its traditional inverse intermarket relationship with commodities as the notorious commodity supercycle more or less coincided with the dollar index rising to a 20-year high. That gave both emerging market importers and dollar-heavy borrowers more pain than they had seen in a generation.

Now, with the dollar index down nine-and-a-half percent from its September high and increasing talk of the Fed moderating its hawkish squeeze as the year rolls out, expectations of foreign fund managers giving Asia another serious look aren’t exactly irrational. But for the money to actually start returning the Fed will have to become less hawkish, and the dollar will have to stay in line, so Q2 could be too soon to expect a turnaround; if at all.

Two, a successful reopening of China, Asia’s biggest economy, will be key to reviving demand, growth and profits all over the region. But, on the flip side, all that could quickly unravel if authorities there are unable to keep new infections in check and another Covid wave leads to more shutdowns.

Besides, even a successful recovery would raise demand for raw materials and increase inflation, which in turn could complicate the Fed’s expected path to less aggressive monetary tightening. Investors will no doubt prefer to wait and see rather than jump into Asia and risk getting their fingers burnt all over again.

Three, Asia tech industry, which includes the world’s largest chipmakers in South Korea and Taiwan, will need to grow out of the beating its stocks took from higher borrowing costs last year. Yet with the Biden administration’s measures to curb China’s technology sector creating uncertainty throughout the sector and the region, investors will have to watch the politics as much as the economics, which takes a longer time to take concrete shape, before making up their minds.

And four, investor and trader sentiment cannot take any sort of reliable shape as long as the risk premium from geopolitical tensions remains high.

There’s no telling when all the confusion stemming from the Russian invasion of Ukraine will tone down, or how many interest rate increases will control European inflation which owes, once again, more to politics than economics.

The anticipated US-China thaw didn’t exactly work out either, with trade tariff disagreements and a renewed standoff over Taiwan still dominating the headlines.

All things considered, there’s enough going on out there to suggest a better new year for Asian equities.

But the push that investors need to commit serious money after a very volatile year is still not there. And until a lot of stars align at just the right time, there’s really a slim chance at best of emerging Asia really turning around in the first half of 2023.

Copyright Business Recorder, 2023

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