Inflation, Monetary Tightening Sway Asian Markets In 2022

Following two years shaken by the COVID-19 pandemic, Asia’s markets this year faced an unprecedented landscape dominated by historic inflation and central banks’ monetary tightening.

The Japanese yen became the biggest loser among major currencies against the dollar as the Fed started rapid rate hikes. At the same time, the region’s best-known high-tech sector stocks, such as Samsung Electronics and Taiwan Semiconductor Manufacturing Co., faced significant downturns due to tighter monetary policies and a projected economic slowdown.

On the other hand, data show that some countries and sectors fared well in the new market environment backed by relevant policy and strong economic fundamentals.

Here’s the wrap of Asian markets in 2022.

Currency: Japanese yen’s depreciation stands out

This year’s currency market activity is ending with the Bank of Japan’s surprise decision to widen its target yield band last week, which triggered appreciation of the yen.

Still, the yen was 13% down against the dollar over the year as of Dec. 21, weakening more significantly than other Asian currencies. The yen at one time fell past 150 per dollar in October for the first time in 32 years, as the BOJ continued to buck the global tightening trend to keep its ultra-loose monetary policy.

“Asian forex has endured a torrid time versus the U.S. dollar this year — in particular the Japanese yen,” Lloyd Chan, Senior Economist at Oxford Economics, said in a note this month.

In contrast, the Singaporean dollar was only 0.15% down as of Dec. 21 against the U.S. dollar. The city-state’s central bank tightened its monetary policy in October for the fifth time since October 2021, as the country attempted to contain inflation.

Bond: Yields rise in tandem with central banks’ policy shift

In tandem with the rate hikes by central banks, government bond yields rose over the year in most Asian countries. For example, the yield for benchmark 10-year government bonds stood at 3.567% in South Korea as of Dec. 21 versus 2.255% at the end of 2021. The BOJ’s decision to widen the yield target band last week pushed the Japanese 10-year government bond yield to 0.470% as of Dec. 21.

Commodities: Prices returned to the level at the beginning of the year

The supply chain disruptions stemming from the Ukraine war revealed how commodities are unevenly distributed worldwide. With Ukraine being a major exporter of grains and Russia a key exporter of oil and gas, wheat and oil prices shot up after the war began over fears of a supply crunch from the two countries, impacting businesses and households in Asia.

Prices of essential energy, food and metal commodities started to fall from the mid-year and have returned to the prewar level, partly due to the resumption of grain exports from Ukraine. But the prospect of a global economic slowdown also weighed on market prices as the year neared its end.

Some base metals showed sensitivity to the economic outlook. For example, copper prices ended more than 10% lower this year as of Dec. 21, mainly due to the economic slowdown in China, the biggest consumer.

Although these prices may have peaked, they are still at a high level in the long-run, posing risks to be sources of inflation in the coming years. The expected inflationary pressure did affect other markets such as bonds, currencies and equities.

Equity: High-tech stocks suffer, banks and airlines gain

Many of Asia’s most valuable companies lost value in 2022. China’s Tencent Holdings and Alibaba Group Holding fell 28% and 29%, respectively, while South Korea’s Samsung Electronics dropped 26% this year as of Dec. 21. TSMC also dropped 25%.

Loss-making companies that grew significantly during the COVID pandemic had a challenging time. Shares in Sea, the Singapore-based e-commerce and online gaming group, dropped 77%.

Among the gainers were commodity-related companies, such as Japan’s oil and gas exploration company Inpex, whose shares rose 40%. The banking sector performed well on increasing interest rates, with Indonesia’s Bank Central Asia up 19%. Airlines stocks such as Singapore Airlines and Japan’s ANA Holdings also recorded double-digit share price rises.

India, Singapore show resilience amid global downturn

While the overall stock market moved downward this year, India’s benchmark Sensex stock price index fared well among Asia’s major indexes, rising 4.8% as of Dec. 21, backed by some of the world’s fastest economic growth.

India is one of the fastest-growing markets in the world, with the economy projected to grow 7.2% in 2023 in the Asian Development Bank’s latest economic outlook released this month, leading to capital inflow into the South Asian country’s stocks in the second half of the year.

Singapore’s Straits Times Index also gained 4.2%. The city-state’s benchmark index is highly exposed to the banking sector, which gained from rising interest rates.

Overall, the stock market downturn that started in late 2021 continued over 2022, with most stock price indexes falling in Asia. Countries with high-tech industries fell significantly, with South Korea’s Kospi and Taiwan’s Taiex dropping about 22% each.

Looking ahead: What will happen in 2023?

With an economic slowdown looming, Asian markets will likely continue to face some headwinds. Chan of Oxford Economics said that the research firm is “downbeat for currencies more sensitive to the global trade cycle, like the South Korean won and the Taiwan dollar, as the external outlook has turned negative.”

Nikkei Asia cited Justin Tang, head of Asian research at United First Partners in Singapore, noted that the Ukraine war and China’s COVID measures will continue to be significant factors to watch in the year ahead.

“Our eyes are on the ongoing situation in Ukraine, so that’s going to increase the inflationary pressures in terms of energy,” he said. As for China, he noted that the government is relaxing its COVID measures but now faces a massive surge of COVID cases.

“We’re not sure whether they will take a step back and implement restrictive measures again, but even if they don’t, the increase in cases would mean that a sizable portion of the labor force might be put out of work for a while and that, again, impacts supply chains.”

“I’m of the view that inflation is still going to be at a fairly high level, at least in an early part of the year,” he said, “And then increased pressure on central banks to at least maintain the trajectory of their rate hikes.”

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