US fiscal deal could spell trouble for Asia's investment winners

By Vikram Subhedar, Reuters

Posted at Jan 03 2013 04:00 PM | Updated as of Jan 04 2013 01:06 AM

A Catholic priest holds a mass before the start of the first trading session of 2013, inside the trading floor of the Philippine Stock Exchange in Makati, January 2, 2013. Photo by Cheryl Ravelo, Reuters

HONG KONG - A resolution to the U.S. fiscal cliff crisis, messy and protracted as it was, provided an immediate boost for financial markets but longer term could spell trouble for some Asian assets that are coming off a stellar 2012.

Investors could start to shift some money out of overpriced or crowded Asian investments in favor of the United States on the view that the fiscal deal manages to avert a U.S. recession and so boosts the prospects for American stocks.

A fall in U.S. equities as funds pulled out some money in the fourth quarter, in contrast to a rally in Asia as funds funneled money into the region, suggest conditions are ripe for some reversal.

"In the short term, U.S. risk premium will come down now that a deal has been struck and might trigger some reversal of flows from Asia back to the U.S.", said Hong Hao, chief equity strategist at Bank of Communication International Securities.

Analysts do not expect a major reversal of funds, but more of a subtle shift as some money managers rebalance their portfolios by taking profits on Asian positions and moving those funds into prospective bets in the United States.

The S&P 500 fell 1 percent from September through December last year in the build up to the presidential election and the so-called fiscal cliff. Markets had worried that in the absence of Congressional action, $600 billion in scheduled tax increases and spending plans would tip the world's biggest economy into a recession.

At the same time, Asian markets rallied. Japan's Nikkei rose 17.2 percent and the MSCI Asia Pacific ex-Japan index rose 5.6 percent.

To be sure, the fiscal deal has done nothing to resolve other political showdowns that loom in coming months such as raising the government debt ceiling and more spending cuts.

However, in the 12 months following August 2011's equally chaotic political wrangling over raising the U.S. borrowing limit during which the country lost its 'AAA' credit rating, the S&P 500 rose 9.5 percent compared with a 14.2 percent drop for Asia ex-Japan markets.


Southeast Asian markets such as Thailand and the Philippines were top performers last year, but a flood of funds has pushed valuations to levels that look less appealing now on a relative basis.

"There are a lot of great companies in ASEAN. But as a market, the region is looking pretty fairly valued," said Bill Maldonado, who oversees about $80 billion as the chief investment officer in Asia-Pacific for HSBC Global Asset Management.

Both Thailand and Philippines, for example, trade at a price-to-book multiple of 2.5 times and Indonesia trades at 3.1 times, all well ahead of 1.5 times for the Asia Pacific overall, Thomson Reuters Starmine data shows.

The U.S. trades at about 2.1 times book value.

Similarly, defensive sectors in Asia Pacific such as healthcare and utilities that are currently trading at expensive valuations could come under pressure.

The healthcare sector in Asia Pacific trades at 18 times forward earnings making it the most expensive in the region followed by utilities that trade at 15.9 times and consumer staples at 15.7 times.

All are well above the 11.5 times forward earnings multiple at which the region trades and no longer offer the relative safety of above-average dividend yields.


Data from fund tracker Lipper, a Thomson Reuters company, shows that $35 billion left U.S. equity funds in the fourth quarter last year compared to a net inflow of about $1 billion for funds with mandates to invest throughout Asia ex-Japan.

Uncertainly over the outcome of the fiscal cliff debate as well as elections had resulted in net outflows in nine of the 11 weeks from mid-September through to the end of last year from U.S. equity funds, data from another fund tracker, EPFR, shows.

Meanwhile emerging market equity funds rounded off a 16-week streak of inflows as a combination of global central bank easing and receding risks of a Chinese hard-landing or a euro zone blow-up combined for an unexpectedly strong year for Asia.

In Asian fixed income markets, corporate bond issuance in Asia hit a record $133.4 billion 2012, dwarfing the previous record of $84.6 billion in 2010, as demand from yield-hungry investors soared.

This year, if U.S. growth stabilizes and companies start investing again, money could start trickling out of Asia from assets where valuations are expensive or positioning is extreme.

"You'd see hot money flows out of Asia if you saw a growth risk in Asia. Hot money flows into and out of Asia tends to be quite cyclical. It's more of an Asian-centric issue," said Atul Lele, a strategist at Credit Suisse in Sydney.