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. Last Updated: 07/27/2016

Currency Woes Hits Asia Stocks

HONG KONG -- Volatile Asian markets face months of uncertainty as the region grapples with the fallout from more flexible currencies.

High interest rates required to support weak currencies are hurting stock markets throughout the Association of South East Asian Nations, or ASEAN, reflecting investor expectations of a decline in the region's famously high economic growth rates.

One broker, Goldman Sachs, has cut its 1997 gross domestic product forecast for the four ASEAN economies worst-hit by currency speculation -- Thailand, Malaysia, the Philippines and Indonesia -- to 5.2 percent from 6.3 percent.

This is still well above growth rates forecast in most of the developed world, but stocks in the "ASEAN four" continued to slide this week.

The action intensified Thursday with a sudden 7 percent fall through key resistance levels in Manila while the Malaysian ringgit sank to a new low of 2.868 to the U.S. dollar.

While some regional strategists say most of the region's stock markets have started to hit bottom, others warn of further currency instability as corporations rush to hedge U.S. dollar liabilities left uncovered when fixed exchange rates held firm.

High rates are pushing up hedging costs for many Asian corporations, depressing earnings expectations and, inevitably, stock markets.

"How long will this go on? Nobody knows," said Daniel Hemmant, currency fund manager at Guinness Flight Asia. "No one knows the extent of the liabilities. And it's become very, very expensive to hedge at this point."

Hemmant said rather than an asset shift into higher-yielding money or debt instruments, the flight out of Asian equities reflected expected disappointment in growth and corporate earnings projections.

Most Asian fund managers were weaned on a bull market, fixed exchange rates and nonexistent bond markets, he said.

They are ill-prepared for Asia's new economic landscape, which will challenge an ability to arbitrage between rates and asset classes.

"Asian fund managers, they're simple creatures," Hemmant said. "Cash does not move efficiently between asset classes in Asia."

Marshall Mays, regional strategist at Nikko Securities, said most Asian fund managers were bound by mandates that prevented them from investing in short-term debt instruments. They also resisted custodian fees in a region where capital accounts are mostly closed and movement of financial assets is restrictive.

Rather than projected growth rate declines and asset shifting, Mays argued that liquidity dictated stock market movements in Asia, particularly in Jakarta, Bangkok and Manila, where market capitalizations fail to reach $100 billion. "Most of the market thinks [gross domestic product] growth is a good proxy for earnings growth, but it's not," Mays said.

"The nice thing about Asia for people [who don't understand it well] is that if they shift money according to growth [expectations] they add liquidity, which kicks it up, and if they pull out, it drops -- which is what's happening now."

Mays believes Asian stock markets have now discounted most of the impact from higher interest rates. The region's huge risk premium is bound to attract institutional interest very soon, although retail interest will likely take at least six months to materialize. Dips will hound affected markets for an equivalent period, he said.