Asian Stocks May Lose 2024 Gains Amid Rate, Tension Woes

MSCI Asia Pacific Index risks losing 2024 gains amid rate hike fears and geopolitical tensions, despite optimism for tech-driven profit growth.

By Barry Stearns

4/16, 21:06 EDT
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Key Takeaway

  • Asian stock benchmark set to erase 2024 gains amid higher interest rate concerns and geopolitical tensions.
  • MSCI Asia Pacific Index drop influenced by consumer discretionary, industrials, and a stronger dollar.
  • Mixed economic data from China and volatility across the region add to market pressures.

Asian Markets Retreat Amid Rate Concerns

The MSCI Asia Pacific Index experienced a downturn, shedding up to 0.4% and poised to negate its yearly gains, primarily due to heightened concerns over prolonged high interest rates and geopolitical tensions. This decline was significantly influenced by Federal Reserve Chair Jerome Powell's indication of a delayed approach to interest rate cuts, diverging from earlier market expectations. The sectors most impacted include consumer discretionary and industrials, highlighting a broad-based retreat across the region. Homin Lee, a senior macro strategist at Lombard Odier, noted, "Asia’s markets are a bit more vulnerable...We see volatility persisting in the near-term and remain neutral."

Geopolitical and Economic Headwinds

The Asian stock benchmark's performance has been hampered by a combination of factors, including the repricing of Federal Reserve rate expectations, a strengthening dollar, escalating Middle East tensions, and China's sluggish economic recovery. Despite a promising start to 2024 with over a 5% gain, these headwinds have prompted a pullback, affecting even the high-flying chip stocks and Japanese equities. Mixed economic data from China, showing underwhelming retail sales and industrial output against a backdrop of better-than-expected GDP growth, further contributed to the market's volatility.

Earnings Season Optimism

Despite the current market challenges, there's a budding optimism for Asia's quarterly earnings growth, with a focus on megacap technology profits, the artificial intelligence boom, and improving Chinese dividends. The MSCI Asia Pacific Index is anticipated to witness its first year-on-year profit growth in eight quarters, driven by technology stocks and a potential turnaround in utilities. Gary Dugan of Dalma Capital Management Ltd. expressed a positive outlook based on regional fundamentals but cautioned against the dampening effects of high US rates and a strong dollar.

Street Views

  • Homin Lee, Lombard Odier (Neutral on Asia's stock market):

    "Asia’s markets are a bit more vulnerable to the combination of geopolitical shocks in the Middle East and rapid shift in interest rate expectations, as they have been operating on lower rates and tend to rely heavily on energy imports and external demand. We see volatility persisting in the near-term and remain neutral."