[SINGAPORE] A seasonal lift for Asian equities in July may be hard to come by this year as tariff and macroeconomic concerns dampen sentiment.
Markets are bracing for heightened volatility ahead of the Jul 9 deadline for countries to cut trade deals with the US. Uncertainty over the outcome of these negotiations poses a hurdle for regional shares to maintain an average return of 1.36 per cent for July, the second-best performing month of the year, over the past decade.
Investors are “somewhat holding back on fresh allocations to emerging Asia”, said Christian Nolting, global chief investment officer at Deutsche Bank’s Private Bank. “While recent comments from high-level negotiators suggest constructive progress in ongoing talks with major Asian trading partners,” uncertainties remain high given that trade disputes during US President Donald Trump’s first term lasted one and a half years, he added.
While the MSCI Asia-Pacific Index has gained for three consecutive months to June, a potential return of “Liberation Day” tariff rates could send shares plunging in the similar way they did in early April.
Trump ruled out delaying the Jul 9 deadline for imposing higher levies on trading partners and renewed threats to hike tariffs on Japan. That saw Japanese shares leading losses in Asia early on Wednesday, with the Nikkei 225 down about 1 per cent.
Even if trade deals materialise, some levels of tariffs are likely to stay. That would be a drag on the region’s export-led economies. A number of central banks in Asia have lowered their growth outlooks for the year. Meanwhile, elevated US interest rates may curb the scope for Asian central banks to further lower borrowing cost.
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“The third quarter looks to have lots of dangerous potholes with higher inflation and the prospect of slower growth,” said Gary Dugan, chief executive officer of the Global CIO Office. “We are not so convinced the Federal Reserve will have sufficient reasons to cut rates at the pace the market prices.”
To be sure, a milder-than-expected tariff outcome and more dovish signalling from the Federal Reserve may encourage flows into the region. Current positioning in Asian assets leaves room for upside, said Gary Tan, a portfolio manager at Allspring Global Investments.
The US central bank has refrained from cutting interest rates this year as it assesses the impact of Trump’s tariffs on inflation. The Trump administration though has been applying pressure to lower borrowing costs, and two Fed governors in recent days have said a cut could be appropriate as soon as July.
The MSCI Asia-Pacific gauge has risen 12 per cent so far this year, outperforming the US, with shares in South Korea and Hong Kong seeing renewed interest. Still, some markets in South-east Asia, where countries were hit with among the highest tariff rates, remain under pressure.
“We continue to expect choppy markets over the summer,” Nomura Holdings strategists, including Chetan Seth, wrote in a recent note. “We recommend investors focus on stock selection and on idiosyncratic themes that provide insulation from policy uncertainty and ones that offer better visibility.” BLOOMBERG
