USD rally may end soon; stocks in India, Indonesia & Korea to gain: HSBC

NEW DELHI: The US dollar rally is nearing its end, and if history is anything to go by, then the Asian stocks have historically performed well when their currency depreciation slows down, said investment bank HSBC in a note today.

India, Indonesia and Korea shares stand to gain, said HSBC’s currency analysts Herald van der Linde and Devendra Joshi. “Currency movements have been the key driver of Asian equities in the last quarter, but the dynamics of this relationship are starting to change,” they added.

Defensives like consumer staples tend to outperform going into currency weakness. Consumer discretionary, technology, banks and materials tend to lead as dollar weakens, said the HSBC note.



As inflation numbers have trended lower, regional central banks have followed their natural instincts - easier policy with easier inflation numbers. Although the US is expected to start raising rates in 2015, it may be some time before the markets have to face an enduring rise in real and nominal interest rates.

As per HSBC, monetary policy divergence has clearly been a key driver of the shift in exchange rates, and offers a clear rationale for the movements we have already seen. The markets are now discounting a 70% probability of the US Fed Funds rate moving above 50bp by year end.

Clearly there is a risk that as the Fed moves, the market will start to price in a normal tightening cycle. But a strong USD is likely to limit the extent of the hiking cycle in the context of a still limited domestic economic recovery.

Neither HSBC nor the market ultimately expect the US rates to rise by very much.



The above table illustrates the performance across markets in these instances. It illustrates that, in general, the markets slide when the home currency depreciates. However, the markets coming out of a currency bottom outperform the broader regional index (MSCI Asia xJP) over the following 3 to 6 months.

Indonesia and India stand out in this regard, followed by Korea. Interestingly, currency movements have been much less important, even after they bottomed, in Thailand.