The Indian tech sector also remains favourable amid the global digitisation demands. Increasing fragmentation may also mean further dependence on Indian IT offerings. A turn in Fed policy, if one was to happen due to the financial risks, also bodes well for the Indian technology stocks. However, the collapse of the Silicon Valley Bank may leave some lasting jitters for Indian tech startups who had deposits in the US. Fresh funding from venture capitalists may remain limited, constraining innovation until funding lines are reaffirmed.
Minimal contagion risks to Asia’s financial sector
Banking sector turmoil is a key focus at the time of writing, following the collapse of some regional US banks and a takeover of Credit Suisse by UBS at a significant discount and wiping out of the Additional Tier-1 capital holders. Even after authorities have stepped in, markets remain nervous about the banking sector outlook on the risk to the funding costs for US, European and other DM banks, which could eventually lead to a credit crunch.
While de-risking portfolios is a key theme in this scenario, it is also prudent to emphasise the benefits of diversification once again. Asian credit, especially at the front end of the curve, remains far less vulnerable in light of a somewhat lower degree of policy tightening in the region in the current cycle. Meanwhile, the largest Asian financial firms are mostly state-owned, primarily in India and China, and they also have limited foreign inflow exposure, which keeps contagion risks restrained. In addition, Asian credit continues to be supported by a better growth outlook in China, in contrast to the rising recession as well as financial risks in the US.
Asia’s reopening tailwinds have room to run
With all the focus shifting recently to concerns on the banking sector, the China reopening theme has been somewhat forgotten by the markets. However, it is worth noting that consumption in China is still on solid recovery ground, and this brings tailwinds to the Asian markets in general. The Chinese policy also remains tilted to growth, and the latest proof of that has come from a cut in reserve requirement ratio in March. To add to that, a likely quicker turn in the Fed monetary policy in light of the financial risks, as well as lower oil prices, also means a supportive stance for Asian equities remains in place.
One of the key beneficiaries of China reopening will likely be travel and tourism stocks in Asia. We launched the Asia Pacific Tourism equity theme basket to capture the expectations of an improvement in China’s outbound tourism. The list contains predominantly Asian stocks across booking platforms, airlines, airport services, hotels, casinos and restaurants in countries that will likely see the biggest inflow of tourists from China over the course of the year. Meanwhile, Thai and Indonesian equities also look promising in Southeast Asia.
North Asian equities in Korea and Taiwan, as well as Japanese banks, are likely to face more significant contagion risks from the US banking stress. Being more export-driven, Korean and Taiwanese equities could also face greater headwinds from slowing global demand. Meanwhile, gains in the safe-haven Japanese yen may weigh on the outlook of overall Japanese equities as well, along with the slower global growth outlook. However, expectations of a tweak in the Bank of Japan’s policy under the new incoming Governor Ueda will be key to monitor.