Delta Variant, China Pull Asia Stocks Further Behind World Peers

Asian stocks tumbled on heightened concern over coronavirus variants and China’s corporate crackdown, deepening their underperformance this year versus peers in the U.S. and Europe.

The MSCI Asia Pacific Index slumped as much as 1.6%, briefly erasing its year-to-date gain for a second time in as many months, before trading down 0.4% as of 4:45 p.m. in Tokyo. Vietnam, South Korea, and the Philippines -- which are all seeing a rise in infections -- were among the biggest losers. The Nikkei 225 Stock Average flirted with a correction before paring its loss, while a gauge of Hong Kong-listed Chinese stocks bounced from the brink of a bear market and climbed.

“Covid-19 resurgences remain a key risk for the region, with Japan being the latest to go under a state of emergency to curb spreads ahead of the Tokyo Olympics,” Jun Rong Yeap, a market strategist at IG Asia Pte., wrote in a note. “This may suggest a slower recovery ahead with third-quarter GDP growth probably revised lower.”

READ: Fed’s Daly Says Delta Variant Threat to Global Recovery: FT

Delta Variant, China Pull Asia Stocks Further Behind World Peers

Asian stocks have faltered after expectations for economic reopenings helped them get the year off to a strong start that drove the regional benchmark to a record high in mid-February. Resurgent infections and worries about inflation have since crushed the reflation trade, while China’s regulatory moves have spooked Hong Kong traders.

“Its a pullback to be expected and then there is rising concern over the delta variant,” said Justin Tang, head of Asian research at United First Partners in Singapore.

The latest selloff -- with the Asian stock gauge headed for its eighth loss in nine sessions -- has widened the gap between regional equities and their global peers. The MSCI Asia Pacific is now up less than 1% for 2021, while the S&P 500 Index has risen 15% and the Stoxx Europe 600 Index has gained more than 13%.

Still, Friday’s losses in Asia came after the S&P 500 Index closed down 0.9% overnight, adding to the prevailing weak sentiment. A surprise dovish shift in policy from China’s central bank on Thursday has added to concerns about the global recovery trade.

“In the near term, we are probably looking at a more risk-off mood,” said Ilya Spivak, head of greater Asia at DailyFX. “The bias for Asian stocks is lower over the next few weeks.”

Delta Variant, China Pull Asia Stocks Further Behind World Peers

Here’s what some other market watchers are saying:

Second Half

  • “Over the past month, we have continued to reduce tech exposure on increased uncertainty and increased stock-specific exposures in renewables, industrial capex etc.,” said Joshua Crabb, a senior portfolio manager at Robeco in Hong Kong
  • “The virus resurgence, along with relatively low vaccination rates, the slowing of the Chinese economy and increased regulatory scrutiny on Chinese tech companies have been key drivers in the market pulling back. How each of these play out, along with other factors such as geopolitics are likely to determine how the second half of the year plays out”

Buying the Dip

  • “What happened overnight (in the U.S.) and today locally is not out of the ordinary,” said Jessica Amir, market analyst at Bell Direct Pty. “Given the strong outlook, investors and fund managers will mostly likely buy the dip after market falls, as this is what we’ve been seeing this year”
  • “Over the longer term – 12-month period, further capital growth is ahead for global equities. There will likely be EPS upgrades everywhere.” Investors will be looking at U.S. reporting season later this month and Australian numbers in August

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