Portfolio | Between China’s currency and Fed rate hike, Asian equities are a no-go

Asian markets are under pressure again as falling currencies and volatile stock markets start to test economies; holding those with weak current accounts and high US dollar debts at risk.

As credit spreads widen and liquidity tightens - witness the People’s Bank of China’s now regular capital injections into China’s financial system and a recent surge in regional sovereign credit default swaps - it’s also a test for investors cautious about where to put their money.

"Confidence on Asian markets was shaken when the CNY (yuan), the region’s anchor currency and stalwart of resilience, was surprisingly devalued against the USD," wrote Credit Suisse analysts last week in a report on Asian market risk.

"This led to a broad-based correction in Asian equities, currencies and fixed income,” with further falls in the yuan-US rate likely to hit trading rivals with "poor fiscal positions and higher foreign holdings of their bonds," the report said, fingering Malaysia and Indonesia.

The Swiss based bank recommends investors shun Southeast Asia and instead focus on European and Japanese equities where respective labour market and corporate governance reforms will bear fruit.

H-shares of Chinese exporters will benefit from a weaker yuan, but on the flip side, property, oil and gas, mining and telecoms stocks - sectors with high US dollar costs and borrowing - will be hurt, Credit Suisse analysts wrote.

On a forward sales growth basis both Chinese H and A shares do look good, wrote Jefferies quantitative strategist Kenneth Chan last week in a separate report that concluded many regional markets look fairly priced after weeks of substantial losses.