Weekly Market Recap

Asia Pacific

19/09/2022

Week in review

U.S. CPI inflation rose to 8.3% y/y, hourly earnings increased 5.2% y/y
UK CPI declined to 9.9% y/y
China industrial output rose 4.2% y/y

Week ahead

U.S. FOMC meeting and rate decision
Eurozone and U.S. PMIs
Japan CPI inflation

Thought of the week

A combination of a hawkish Federal Reserve and safe haven seeking capital flows have pushed the U.S. dollar (USD) further into overvalued territory, with the USD index gaining more than 14% year-to-date (YTD), reaching a five-decade high on a trade-weighted basis. It is no secret that Asian currencies have underperformed against the USD this year: the Japanese Yen has declined 20%, the Chinese Yuan down 8%, while Association of Southeast Asian currencies have fallen more than 6% on average. While a weaker currency typically implies stronger earnings per share growth for Asia ex-Japan companies as it serves as a tailwind for exports, currency depreciation also eats into an investors’ total return. Over the past 15-years, close to 10% of international equity underperformance relative to U.S. equity can be attributed to weak foreign exchange performance against the USD. With the Fed’s hawkish stance unlikely to budge in the near-term, its likely that greenback will remain at elevated levels for the time being. What should investors do? While hedging offers short-term benefits, the effect washes away over time and investors also need to consider the increased cost of hedging. For long-term investors, investing in Asia ex-Japan equities on an unhedged basis could help capitalize on re-opening tailwinds in the region as well as benefit from the eventual reversal of the U.S. dollar to fair value as structural economic fundamentals such as trade balance, growth and inflation dynamics take hold.

Sources of Asia ex-Japan equity returns

Total return, U.S. dollar

Source: FactSet, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 17/09/22.

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