While the Asian financial storm is far from being over, the FED recently decided not to hike up the interest rates as the conditions in the global economy have changed dramatically since the last Federal Open Market Committee meeting.

 Federal Funds Rate vs. Bank of  England  Base RateRates

The Shanghai Stock Exchange Index (SSE) keeps maintaining its downward trend, losing up to 15% in the last 30 days, reaching the lowest value of 2927.25 in Aug 26. Following the strong financial measures adopted from the Chinese government along with a positive response from the US regarding the interest rates, analysts would have expected a slight upward change in the Chinese stock market that, however, did not happen, highlighting investors’ concerns about China slowdown and Yellen’s warnings about weaker global growth perspectives. A Fed interest rate hike would increase the attractiveness of US dollar denominated assets and thus generate capital outflows from the China and Emerging Markets towards Wall Street.

 Shanghai 1 M

Japanese counterparts seems to be reluctant to changes as Abe gets reelected and uncertainty regarding structural reforms (Abenomics’ third arrow) still persists. This position is shared by Standard & Poor’s who, on Sept 16, downgraded Japan from AA- to A+. The uncertainty is shown as well in the NIKKEI, where high volatility was registered  in the last weeks (+7,5% Sept 9). The USD/JPY pair, In the last month, traded in the ¥ 120-123 range and at the moment one dollar is worth  ¥ 120.07. The release of the Japanese National Consumption Index due the next week, might affect the exchange rate, and, if the preliminary results for inflation of 0,1% (against the 2,0% target) were to be confirmed, further stimulus from the BoJ might become reality. This scenario will involve a further weakening of the JPY.

 Tokyo, Nikkei  225 1Y PerformanceN225

Looking beyond those two giants, other Asian countries are on the rise. In fact, several experts strongly believe that the ASEAN (Association of Southeast Asian Nations) will be the new BRICS. While BRICS economies struggle, as Brazil was recently downgraded to junk bond (BB+) from S&P along with the Russian Ruble losing more than half of its value (USD/RUB +70% 1y), one of the most prominent ASEAN’s country, Malaysia, gained a + 6,02% (1M) in FTSE Bursa Malaysia KLCI Index. This negative correlation ( Shanghai Index 1 M -18.34%, KLCI Index 1 M +6%) shows how ASEAN economies are getting more and more independent from other emerging markets.

Kuala Lumpur, FTSE KLSE, 1Y PerformanceKLSE

Furthermore, recent political and economic reforms strongly support this view as well. In fact, ASEAN countries have recently established an “Asian Region Funds Passport” that will provide a multilaterally agreed framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region. This partnership will enhance the expansion of the asset management industry in the region and further tighten the connections between these rising economies.

By

Ludovico Buffo, Master Student

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