Volatility gauges are signalling that investors may have significantly cut their exposure to Asian stocks, bolstering the case that the region’s equities now have limited downside after a bruising year.
Volatility indices tied to stock benchmarks in Japan, South Korea, Hong Kong and India now average 23.7, down from a high of 32.6 in March. Their US counterpart stands at 28.6.
Implied volatility tends to rise when asset prices suffer a downtrend, as investors snap up put options to hedge against further losses. It typically falls in bullish markets. There are signs that global investors are turning more optimistic about the region’s outlook, with Morgan Stanley now calling a bear-market bottom for shares in Asia, excluding Japan, citing cheap valuations following the record slump. A nascent debate is also underway over how uber-hawkish the Federal Reserve can afford to stay now that cracks are starting toemerge in the US economy.
Despite a 25% drop in MSCI’s Asian benchmark, the region’s key volatility indexes have not only stayed low but have also consistently lagged their US peer this year. That’s a break from tradition as investors usually expect wilder swings in emergingmarkets due to the latter’s perceived higher risks. Their relative composure also stands in contrast to surging volatilityin the global currency and bond markets.
To be sure, there’s a risk implied volatility in Asianequities may spike again if global markets enter an even moreworrisome stage of stress, when recession becomes a reality orgeopolitical tensions involving Russia or China escalatesharply. The average of the four gauges hit a record of nearly86 in 2008 during the global financial crisis.
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