Asia-Pacific Stocks Rocked by U.S. Turmoil: Portfolio Shifts Needed
In the world of finance, the ripple effects of a single event can often send profound shockwaves throughout the markets, impacting sectors, industries, and nations. Recently, the U.S. stock market endured a notable downturn, largely catalyzed by what has been dubbed the “Trump 2.0 Trade.” This term has come to signify a period characterized by rising apprehensions regarding global trade policies, particularly in the tech sector. The Nasdaq 100 index, a barometer for technology companies, saw a staggering decline of 6.54% over the preceding two weeks. Nevertheless, the last trading day of July 26th offered a glimmer of hope, as investors saw a minor rebound in U.S. stocks.
The repercussions of this downturn were not confined to American markets alone; the technology stocks in the Asia-Pacific region also faced significant pressure. For example, on July 26th, the shares of Taiwan Semiconductor Manufacturing Company (TSMC) fell by more than 5% in a single day, underscoring the depth of the crisis. Cumulatively, the MSCI Asia Pacific Ex-Japan Index (MXAPJ) dropped by 1.9%, following declines of 2% to 4% across various stock exchanges in Taiwan, South Korea, and mainland China. Meanwhile, markets in India and Indonesia did demonstrate resilience, with returns of 2% and 0.3%, respectively. Notably, the sell-off in U.S. tech stocks prompted foreign investors to withdraw from Taiwan's stock market, with net outflows exceeding $2.1 billion.
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Market experts are now mulling the implications of these shifts. Huang Senwei, a reputable market strategist from Invesco, expressed his thoughts in a recent interview. He noted that the historical average of U.S. economic expansion cycles extends to about 64 months, suggesting that a recession might not occur until 2024. On the other hand, he highlighted the likelihood of continued shifts in fund allocations, suggesting that the rotation from large-cap to mid-cap stocks could persist. Recent macroeconomic data—particularly regarding consumer spending and employment—indicates a lower probability for the U.S. stocks to experience a decline exceeding 20%. Despite the exodus of foreign capital, the relative attractiveness of A-shares remains strong, with valuations still low and potentially benefitting from anticipated interest rate cuts in September.
The issue of concentrated risk within the U.S. stock market has emerged as a recurrent theme. Investor focus has predominantly been on the "Magnificent Seven" technology giants – companies whose performance has dictated market trends for quite some time. However, when a crowded trade begins to unwind, the chances of a substantial market shock become probable. The recent comments by former President Trump about the semiconductor industry and geopolitical tensions directly influenced a significant stock wipeout in TSMC, contributing to an 8% drop on July 17th. Such developments have sparked fears that protectionist policies could impose long-lasting challenges on larger technology firms.
As one observes the ongoing shifts, however, a broader picture begins to emerge. Small-cap stocks, which had struggled for nearly three years, appear to be finding their footing again. The Russell 2000 index has outperformed the S&P 500 for two consecutive weeks, witnessing an increase of 1.67% just last week compared to a 1% drop in the S&P 500. The gap between the two indices is the widest seen in four decades, indicative of a meaningful shift towards stocks that are less sensitive to international trade and tariffs.
Encouragingly, as the market turned on July 26th, large-cap stocks also showed signs of recovery. The S&P 500 index climbed by 1.11% to close at 5,459.1, while the Nasdaq 100 index rose by 1.03% to 19,023.66. Analysts remain cautiously optimistic, asserting that the downturn in tech stocks is merely a correction rather than an onset of a full-blown bear market. Reports from major tech firms, however, couldn’t entirely quell the anxiety among investors. For instance, after Tesla's post-market earnings report on July 24th, the company’s shares fell by 8%. Despite beating revenue expectations with a total of $25.5 billion, the automotive business witnessed a year-on-year revenue decline of 7%. Additionally, the gross margin on its automotive segment dropped to 14.6%, prompting CEO Elon Musk to delay the launch of the eagerly anticipated Robotaxi to October.
Similarly, Alphabet's quarterly performance, while exceeding revenue and profit estimates, revealed a slowdown in advertising growth—a key revenue driver. With YouTube advertising revenue coming in below expectations, stocks fell more than 2% after hours. Analysts contend that while the concentration in the top seven tech companies is high, this does not translate into a bubble, as their price-to-earnings ratios remain reasonable. Furthermore, it is anticipated that monetary policy changes, particularly potential interest rate cuts by the Federal Reserve, could provide some breathing room for small-cap stocks that are particularly sensitive to interest rate fluctuations.
The imminent Federal Reserve meeting at the end of July will be pivotal. Chairman Jerome Powell's assessment of the economy is likely to influence market sentiments heavily, with many anticipating a potential rate cut in September, and again in December. Recent numbers indicate that the core Personal Consumption Expenditures (PCE) inflation rate stands at 2.6%, exceeding the expected reading of 2.5%, while GDP growth for the second quarter clocked in at an impressive 2.8%. This data released earlier has largely dampened anticipation for an immediate rate cut in July.
Simultaneously, the withdrawal of capital from the Asia Pacific markets has provoked considerable unease. The MXAPJ index noted a decline of 1.9% as utility, healthcare, and software sectors showed resilience in stark contrast to hardware and semiconductor segments that were previously thriving. The trend of foreign capital exiting from Taiwan has continued, with the net outflow exceedingly high.
As data continues to unfold, it's apparent that while foreign capital is flowing out, we may be nearing a turning point in market sentiment. Zhu Liang, an investment director at Invesco, recently indicated that history suggests that when market sentiment reaches a low point, subsequent three, six, and twelve-month phases witness respectable gains in indices like the CSI 800, forecasting a rebound as sentiment stabilizes. Advantageous policies in manufacturing and increased dividend payouts are being noted by foreign investors as they analyze future investments.
Additionally, the domestic market narrative appears to mirror the activities seen in foreign capital. Public equity funds are allocating more resources towards electronic, communication, and utility sectors, aligning closely with defensive positioning amidst ongoing uncertainty. The caution exercised over high-dividend stocks—which had seen overwhelming demand—has raised investor concerns. Analysts from UBS noted that despite some extensions in coal and banking sectors in recent quarters, these remain underweight, hinting at a sustained strategy to explore dividend-driven investments.
In conclusion, while the market faces considerable pressures, understanding underlying themes and market adjustments provides a roadmap as investors navigate uncertain waters. The A-shares are set for a recovery as sentiment shifts, particularly with favorable indicators emerging and speculation about further interest rate cuts, potentially leading to a return of inflows and stabilization in the markets.