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Beware, Asia Stock Rallies Can Be Just Bear-Market Bounces

Wednesday 25th March 2020

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Even though Asia stocks are rebounding Tuesday, market watchers are still cautious: sentiment, liquidity and earnings could get much worse if the economic damage caused by the virus outbreak is anything close to the global financial crisis.

The MSCI Asia Pacific Index climbed 4.3% as of 10:53 a.m. in Hong Kong after closing at a four-year low. The Federal Reserve’s latest measures to buy unlimited amount of bonds to keep borrowing costs low sent the U.S. dollar lower in a boost for the region’s emerging markets.

But even with billions of dollars in pledged stimulus, a major worry for equity investors is how much the pandemic will affect the economy and company profits as infections keep rising and nations go on lockdown.

“It is becoming clearer that the current Covid-19 outbreak will a have significant impact on GDP/earnings outlooks, as more and more countries announce city/state/countrywide lockdowns,” Nomura Holdings Inc. strategists including Chetan Seth wrote in a note. “The cascading second-round impact of such measures, in our view, will have significant implications for growth.”

For Asian equities, things could get worse before they get better, if technicals are any guide. Despite a 35% plunge from its peak in 2018 through the last close, the MSCI Asia Pacific Index has yet to near the maximum decline it saw during the global financial crisis -- it plunged 59% from its high in 2007 to the 2009 low.

Worse yet, on the heels of the index’s break below an 11-year-old support line, the gauge’s 50-day moving average has now crossed below its 200-day line, forming a so-called death cross pattern.

The 12-month rolling foreign flows in most Asian nations have turned negative, but the damage is no way near what was witnessed in 2008-2009. The selling also looks small as a percentage of market value given that the region’s markets hit peaks in recent years.

For MSCI Asia Pacific companies, earnings estimates for the next year have fallen about 13% from their peak, compared with a 58% slump from a high during the global financial crisis. Given that the outbreak’s economic impact could last for several quarters, there is scope for more profit downgrades by analysts.


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