Asian Stocks to Waver With Focus on Fed Meeting: Markets Wrap

Asian stocks are expected to waver this week as investors await the Federal Reserve's interest rate decision, with the central bank widely anticipated to cut rates by 25 basis points. The Fed's policy move will significantly impact Asian currencies and their respective stock markets, as higher interest rates strengthen the US dollar and lead to capital outflows from Asian markets. This currency devaluation, coupled with reduced risk appetite, contributes to a sell-off in Asian stock markets.

The MSCI Asia (ex-Japan) stock index has fallen by about 28% since its peak in early 2021, with most national and regional stock markets trending lower. However, a balanced portfolio approach, combining growth and value stocks, can help mitigate risks and capitalize on opportunities in under-owned sectors like energy stocks.



Sectors most sensitive to US interest rates include technology, consumer discretionary, and financials. These sectors are likely to react negatively to a rate cut, as higher interest rates make borrowing costs more expensive, reducing the attractiveness of these sectors to investors. Conversely, sectors such as energy, utilities, and consumer staples may benefit from a rate cut, as lower interest rates make borrowing costs cheaper, increasing the attractiveness of these sectors to investors.

Asian stocks are likely to waver with a focus on the Fed meeting, as investors await clarity on the central bank's long-term rate outlook. The Fed's rate hikes decrease money market liquidity, further impacting Asian markets. Therefore, Asian stocks are likely to waver with a focus on the Fed meeting, as investors await clarity on the central bank's long-term rate outlook.

Asian economies with high current account deficits and low foreign exchange reserves face significant currency devaluation risks. For instance, Sri Lanka's current account deficit reached 3.5% of GDP in 2021, with foreign exchange reserves covering just 1.9 months of imports. Consequently, the Sri Lankan rupee depreciated by over 90% against the US dollar from 2020 to 2022. Similarly, Turkey's current account deficit was 4.3% of GDP in 2021, with foreign exchange reserves covering only 2.3 months of imports, leading to a 33% depreciation in the Turkish lira.



To mitigate these risks, these countries may need to implement fiscal austerity measures, raise interest rates, or seek international assistance. Additionally, Asian economies that experienced significant foreign capital inflows during the QE era face challenges managing capital outflows as the Fed tightens monetary policy. With the U.S. dollar strengthening and U.S. assets becoming more attractive, there's a risk of capital repatriation, leading to currency depreciation and asset price declines. To mitigate these risks, Asian economies can implement measures such as maintaining fiscal discipline, promoting domestic investment, and enhancing financial sector resilience. Additionally, diversifying trade relationships and encouraging regional integration can help reduce dependence on a single market, like the U.S.

In conclusion, Asian stocks are expected to waver this week as investors await the Federal Reserve's interest rate decision. The Fed's policy move will significantly impact Asian currencies and their respective stock markets, with sectors most sensitive to US interest rates likely to react negatively to a rate cut. Asian economies with high current account deficits and low foreign exchange reserves face significant currency devaluation risks, while those with significant exposure to U.S. dollar-denominated debt are vulnerable to capital outflows. To mitigate these risks, Asian economies can implement various measures to promote fiscal discipline, domestic investment, and regional integration.