BNY’s EMEA Macro Strategist Geoff Yu observes that EM APAC remains the best-held equity region globally despite sharp swings and sector-specific risks such as semiconductors’ helium exposure. He sees scope for increased APAC allocations supported by light prior U.S. exposure and potential Chinese demand, but expects higher hedge ratios as energy costs and front-end yields weigh on flows and temper further gains.

Strong holdings but higher hedge ratios

"Some of the biggest equity market swings over the past two weeks have taken place in APAC. The boundary between EM and Developed Market Asia is often blurred, but equity markets with elevated pre-conflict exposure to tech or the global AI complex were most at risk of a significant correction. We believe supply risks remain for the affected industries."

"Fitch notes that South Korea sourced nearly 65% of its helium imports from Qatar last year, and Japan on Monday was compelled to publicly disclose its reserves level. Nonetheless, EM APAC remains the best-held equity market region globally, while developed economies in the region are also better-held than their global peers."

"We are broadly sympathetic to the case for increased APAC holdings as asset exposures to U.S. investments were relatively light even before the recent adjustment. The prospect of improved Chinese demand due to base effects and additional stimulus is another idiosyncratic factor that can underpin the region, though growth targets at the recent National People’s Congress have not surprised to the upside."

"However, in the near term, we believe hedge ratios will need to be high. Rising energy costs will damage Asia’s balance of payments, while rising front-end global yields will also dampen repatriation interest for traditional funders."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)