JPMorgan-ASEAN Equity Strategy Strengthening USD - A risk-off indic...

Global Research29 May 2023J P M O R G A Nwww.jpmorganmarkets.comEquity Macro ResearchRajiv Batra AC(65) 6882-8151rajiv.j.batra@jpmorgan.comBloomberg JPMA BATRA <GO>J.P. Morgan Securities Singapore Private LimitedKhoi Vu, CFA(65) 6882-8170khoi.t.vu@jpmorgan.comJ.P. Morgan Securities Singapore Private LimitedTony SK Lee(852) 2800-8857tony.sk.lee@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) Limited•The DXY index has risen 3% since May 5, and this could pose a test for equity bulls. The first China growth downgrade post-reopening and EU EASI˖s turning negative removes the counterweight pinning the dollar index down and paves the way for USD to freely respond to end of cycle concerns (link). Currencies in the ASEAN region have depreciated by an average 2.5% since early May – MYR (-4%) and THB (-3%) are the worst performing currencies.•Historically, exporters have been key beneficiaries of a stronger dollar. Given slowdown in global growth momentum or imminent recession concerns do not augur well for all exporters. The export share of GDP is the largest in Malaysia and Thailand (Figure 9). However, China˖s April data points to a big loss in recovery momentum, which suggests a challenging environment for Asia˖s exports. China has been Malaysia's largest trading partner for 13 consecutive years and MYR has been the most correlated EM currency to the CNY over the last 5 years (Figure 3). MYR is also dragged down by the near 40% drop in Brent oil prices from a peak in 2022. As global economic headwinds intensify, equity outflows when materialized may further increase current account pressures already being felt by a few economies in the region. Based on J.P. Morgan Economics team forecast, Philippines is the only country in the ASEAN region with a current account deficit in 2023 (Figure 11).•All ASEAN countries except Vietnam and sectors except IT delivered negative returns during the recent dollar rally (Figure 12 & Figure 14). Vietnam equities benefitted from monetary policy easing (third cut by SBV since mid-March) to support economic growth, increase liquidity and easing the credit crunch faced by property developers. Despite negative returns, Indonesia continues to outperform, driven by a strong 1Q23 earnings season and solid fiscal position (IDR332tn in excess savings, 1.6% of GDP). Although CPO prices have moderated, coal prices have remained resilient compared to natural gas prices. J.P. Morgan Economics team raised Indonesia˖s trade balance forecast to US$51 billion and the current account to a US$5.1 billion surplus (0.4% of GDP). •The market is projecting a sharp Fed pivot in 2H. If these do not materialize, USD bounce might continue, arresting the near 10% depreciation since October. Pricing out of rate cuts would naturally occur if the economy stays resilient for longer, but a strengthening USD is usually a risk-off indicator for markets. A stronger USD has predominantly been associated with wea