Given the sizable upside for regional trade supporting local economies and the ASEAN Bursas, stocks in Asia are nudging up despite weakness in the US market as East vs. West divergence continues. After all, Mainland China is the largest export market for most regional economies, so the China reopening bounce is particularly pronounced locally.
Australia is also heavily exposed to Chinese markets, with nearly half of the country’s exports headed to China, primarily hard commodities and coal. Among other economies in the region, approximately one-third of exports from New Zealand, Korea, Malaysia and the Philippines are shipped to China, followed by Indonesia, Japan, Thailand, and Vietnam, with their China-bound exports ranging between 20% and 30%
To gauge the potential impact of China’s reopening on imports of goods, peer over at oil prices as correlations between mobility and oil prices also hold sway on goods imports.
And this bottom-line positive economic impact on regional economies will boost ASEAN currencies and attract USD investments as Long Only Asset Funds become increasingly concerned about the value of the US dollar and start looking outside of the US Asset. Foreign inflows have already picked up to China and Europe. While those flows should increase, supporting both the Yuan and EURO, investors will then shift along the risk curve and look for more significant returns in riskier assets where EM Asia holds an alluring appeal given the economic zap via the exports to China channel when mainland consumer enter the post-pandemic pent up buying zone.
While we are still reluctant to Chase USDCNH below 6.70 due to possible policymakers push back, given the RMB strength in the CFETS basket, especially when China is trying to fire up its export engines, the MYR and THB continue to stand out on China reopening metrics.
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THB has been one of our top picks since early December, supported by a return to a healthy current account surplus. China’s reopening is adding further fuel to the tourism recovery, and it is still flagging due to a lack of available flights, but that could return to trend later in 2023. But lower freight costs are meaningful too. While THB has had a big move already, it is historically a trading currency, and its fair value could eventually be closer to 30 USDTHB
Beyond the China reopening, we like the Malaysia ringgit, given the political risk premium embedded in the currency since 2018 is finally evaporating. But Malaysian exporters were one of the biggest USD liquidity hoarders from 2021-22, and that sell-off is adding fuel to the MYR reopening fire. Given that the ringgit is a restricted currency and there are no viable or legal OTC NDF markets, gaining access to the MYR is primarily via MGS and local stock markets, which can provide exposure to the underlying MYR.
Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT
