Why the Fed-induced rally in Asian emerging markets is petering out

Investors’ appetite for Asian emerging markets’ stocks, bonds and currencies is spent, and for reasons that go beyond the overriding question of when and how the US Federal Reserve will reverse its loose monetary policies.

Dissatisfied with the economic recovery in the region, disappointed with corporate earnings and worried that currencies have little room to rally further, investors seem to be abandoning the rally that was sparked in mid-September by the Fed’s decision not to start tapering its stimulus.

“We need to see much stronger export growth in emerging markets,” wrote UBS strategist Bhanu Baweja.

Baweja said that was a precondition to achieving better earnings growth as well as improvements in regional current account balances.

That leaves most Asian markets well below their highs for the year, struck in May. Indonesia’s rupiah is 14 per cent weaker than its May high, while the Philippine stock market is about 12 per cent below the May peak.

Markets surged after September 18, when the Fed held back from cutting its massive asset purchase programme, but investors know it’s only a matter of time, and data, before five years of easy US monetary policy is wound back.