Asian Stocks To Face Pressure After U.S. Fed's Hawkish Stance, Says Nomura

Asian stocks may face pressure due to rising U.S. Treasury yields and a strengthening dollar after the Federal Reserve kept policy rates unchanged, according to Nomura.

The dot plot projections for 2024 and 2025 showed that Fed chairman Jerome Powell and other members still see the possibility of "higher-for-longer" interest rates, Nomura said.

Further, the Fed raised the 2023 economic growth projection from 1% to 2.1% and projected 1% growth for 2024.

Future monetary policy decisions will depend on various factors, such as economic growth (including the labour market and consumption) and inflation data, the brokerage said.

The Fed continues to see one more rate hike in the rest of 2023.

These factors are subject to uncertainty due to several influences, including energy price fluctuations, labour strikes in the U.S. affecting wages, the impact of student loan repayment on consumption, and the potential for a U.S. government shutdown, said Nomura.

Nomura sees the pullback in Asian stocks as an opportunity for investors to acquire assets in areas with positive fundamental outlooks. However, the brokerage expects that unprofitable tech investments, long-duration plays, and sectors with very high valuations will likely continue to face pressure.

“I see this as a hawkish pause, but this could be constructive for bond investors as our expectation is that we are quite close to the Fed hiking cycle for now,” Audrey Goh of Standard Chartered Wealth told BQ Prime.

"We have a balanced portfolio, but with a slight tilt towards equity markets," she said. "Our balanced portfolio is up c.7% which lagged robust performance in equity markets but outperformed bond markets."

"At this point in the business cycle, we might be transitioning towards lower growth and potentially even a recession," she said. "We have a 55% probability of a U.S. recession by the first half of the next year."

"Given this as the base case, we keep a largely balanced allocation," she said.