Stock information is displayed on an electronic board at a securities brokerage in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Shell-Shocked Stock Investors See No Reason to Trust Asia Rally

(Bloomberg) -- Asia stocks just notched their best streak in a year, China’s in a bull market and momentum indicators are white hot. But while money managers say they welcome the recovery from last quarter’s pummeling, they have yet to find any good reason to trust it.

Even the ones who avoided selling everything before markets turned around are preaching caution. Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets, is long some technology shares but says he will sell at the first sign of trouble. Olivier d’Assier at Axioma Inc. advises buying cheap hedges as the U.S.-China tariff saga drags on.

Chalk it up to shell shock spurred by what may end up being the biggest quarterly reversal for Asian equities in a decade. After plunging in October and December, shares everywhere have rallied amid trade optimism and a pause in Federal Reserve rate hikes. The MSCI Asia Pacific Index has climbed 13 percent from its 2018 low, while the benchmark for American shares has rallied almost 19 percent.

Shell-Shocked Stock Investors See No Reason to Trust Asia Rally

Though stymied Tuesday, the MSCI Asia Pacific Index posted a six-day advance that qualified as the longest in a year, helped after U.S. President Donald Trump tweeted optimism over trade negotiations and a delay in tariffs. China’s CSI 300 Index and Shanghai Composite Index entered bull markets Monday on indications the government will weaken its leverage crackdown. The Asian benchmark gauge gained 0.1 percent as of 4:27 p.m. in Hong Kong Wednesday.

Still, with December’s drubbing fresh in mind, investors were practically unanimous that remains too early to sound all-clear on the region’s economies or politics.

Shell-Shocked Stock Investors See No Reason to Trust Asia Rally

Kerry Craig, a Melbourne-based global market strategist at JPMorgan Asset Management, said: “It would need to have a significant level of improvement towards those tariffs being repealed for the markets to have a very strong positive reaction.”

Risk Protection

Hiroshi Matsumoto of Pictet Asset Management Ltd. and JPMorgan’s Craig say progress is good, but obstacles remain. Craig positioned toward a “more defensive allocation” with a focus on the Fed March meeting more than anything else.

D’Assier, head of applied research for Asia Pacific at Axioma, is worried about more than the U.S.-China trade war. “Investors need to focus more on downside risk protection than upside potential. This means risk assets need to be hedged with negatively correlated ones.”

The cost of hedging against declines for gauges including the Nikkei 225 Stock Average and Hong Kong’s Hang Seng Index has recently fallen.

“If we can remove one monkey (the trade war) from our backs, great, but we still have the others,” d’Assier said, citing Brexit, populism in Europe, weak German leadership, partisan politics in the U.S., and a huge debt pile. “So proceed with caution as risk taking won’t necessarily be rewarded from now on.”

Volatility Bump

In Sydney, Nick Twidale, chief operating officer at Rakuten Securities Australia Pty, is bracing for a volatility bump.

“Investors will continue to trade from a positive stand point, but anything that comes out that could possibly derail a China-U.S. trade deal will probably lead to some strong profit-taking flows and a decent downside correction and increase in volatility,” he said.

“There are reasons to celebrate,” said Sydney-based Nader Naeimi of AMP Capital Investors Ltd. “But there are significant unanswered questions: Have we avoided a recession? Has the Fed managed to engineer a soft landing?”

As the U.S. and China sides are “highly unlikely to see a grand deal,” he added, “the uncertainty will linger and will impact business sentiment. Markets have priced in an optimistic scenario for now, and there is room for disappointment and short term market weakness.”

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