Asian Stocks Lose $5 Trillion This Year With No End in Sight

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After a slump in U.S. stocks, Asia’s main equity gauge has finally succumbed, entering a bear market overnight. The region’s equities have already lost more than $4.9 trillion in value this year, and Thursday isn’t looking pretty.

The MSCI Asia Pacific Index fell 2 percent as of 4:30p.m. in Hong Kong, taking its slide from a January peak to 22 percent. Japan’s Topix index plunged 3.1 percent to its lowest level since September 2017, while the Nikkei 225 Stock Average lost 3.7 percent. The Kospi index’s 1.6 percent slide pushed the South Korean gauge into bear-market territory after data showed the economy grew less than projected in the third quarter. Hong Kong stocks also tanked.

Following big plunges in the U.S. Wednesday, American stock-index futures hinted that the rout could take a small breather. December contracts on the S&P 500 Index rose 0.6 percent. Futures on the Nasdaq 100 Index and Dow Jones Industrial Average climbed 1.1 percent and 0.6 percent, respectively.

Still, the Wednesday rout was a big hit to sentiment: tech-heavy Nasdaq Composite Index plunged 4.4 percent for its biggest single-day slide since August 2011, entering a correction. Both the Dow Jones Industrial Average and S&P 500 erased their annual gains, even as the S&P 500 operating income is surging more than twice the historical average.

Volatility is back, and investors in Asia are bracing for more. The MSCI Asia Pacific Index has moved an average 0.9 percent daily in October through Wednesday, the biggest swings since June 2016, data compiled by Bloomberg show. On Thursday, China’s Shanghai Composite Index was little changed after it fell as much as 2.8 percent, and Hong Kong’s Hang Seng Index lost 1 percent. Australia’s S&P/ASX 200 Index fell 2.8 percent, entering a correction.

The reasons for the slump in Asia are well known: there’s the U.S.-China trade war, worries about slowing economic and earnings growth, tech shares plunging and rising rates amid Federal Reserve tightening. But this week, the biggest point of concern for investors including UOB Kay Hian (Hong Kong) Ltd.’s Steven Leung has been the U.S. dollar, which hit a new high Wednesday.

“The U.S. dollar has been strengthening this year and the pace has accelerated,” said Leung, executive director at UOB in Hong Kong. “Money may continue to go back to the U.S. and make the emerging-markets outflow worse for the rest of this year.”

The strengthening greenback has led to massive foreign outflows from Asian equity funds and has forced local central banks to raise interest rates in order to protect their plunging currencies. That, in turn, has created more pressure on local stock markets, Leung said. He expects equity swings to continue in the region.

The Federal Reserve’s hawkish remarks earlier this month and Chinese stocks falling to a sensitive level — the Shanghai Composite Index is trading near its lowest level since November 2014 — are only adding to the pressure, said Armand Yeung, the managing director of Central Asset Investments in Hong Kong.

“Could Asian markets really withstand four rate hikes in U.S. next year? People should really think about that,” said Yeung. “Most people — like us — are very cautious nowadays and have been reducing their equity exposure, or just focusing on defensive stocks or buying some bonds.”

With an 11 percent plunge in October, the MSCI Asia Pacific Index is heading for its biggest monthly decline since the height of the financial crisis a decade ago. It’s fallen more than the S&P 500 and the Stoxx Europe 600 Index, and most of the world’s worst-performing equity markets are from Asia this year. If the weakness continues in tech shares — they account for a fifth of the regional benchmark index and are the biggest declining group in 2018 — investors may just have to brace for more turbulence ahead.

“We still do not know the full outcome of this trade war as the U.S. and China act and react with rhetoric,” said Jim McCafferty, the head of equity research for Asia ex-Japan at Nomura Holdings Inc. “U.S. tech names are also highly volatile, so it is inevitable that this volatility will spread to the supply chain in Asia.”

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