The U.S. dollar’s rise is set to pressure Southeast Asian currencies and become a headwind for the region’s stocks, Nomura said in a note last week.
In a scenario of weaker domestic currencies and a stronger U.S. dollar, “we believe investor sentiment could take a beating even though overall fundamental impact is manageable for most ASEAN markets,” Nomura said. “Situations like these usually see market-wide selling and, by definition, it is concentrated in large/index stocks with relatively high foreign ownership.” ASEAN stands for the Association of Southeast Asian Nations.
The dollar index, which measures the greenback against a basket of currencies, was at 92.5660 on Friday, up from levels under 90 in mid-April. Additionally, the 10-year U.S. Treasury yield has been flirting with the key psychological and technical 3 percent level; on Friday it was at 2.95 percent.
That’s put pressure on Southeast Asian currencies and boosted domestic bond yields, as the rise in U.S. bond yields spurred fears of capital outflows from riskier assets, Nomura said.
“While there is clearly the sentiment impact of weaker domestic FX on ASEAN equities, historically, weak domestic FX has also coincided with weak corporate earnings,” it noted, adding that the rising domestic bond yields imply valuation headwinds from higher cost of capital assumptions.
Nomura also noted that historically, a stronger U.S. dollar has been negative for emerging market equities and assets, which, if the U.S. dollar continues to rise, could also pressure Southeast Asian stocks.
But it added, investors needed to differentiate stocks suffering from weaker domestic currencies from stocks caught in any market-wide selloff.
Within Singapore, Nomura pointed to three stocks that would be positively impacted by a weaker domestic currency.
It noted Sembcorp Marine has a net long exposure to the U.S. dollar, with its contracts and costs denominated in the U.S. as well as having around S$1 billion of net U.S. dollar-denominated financial assets on its balance sheet.
Rival rigbuilder Keppel Corp. also has contracts and costs in the U.S. dollar, Nomura noted.
Taxi operator ComfortDelGro has businesses in China, Australia and the U.K., with its revenue and costs in the local currencies as well as minimal debt on its balance sheet, Nomura said.