Asian equities, a positive moment: with low inflation, central banks will cut rates

Lower inflation will allow central banks to cut rates. The U.S. dollar has weakened against most Asian currencies, which is positive for their equity markets.

by Marcel Zimmermann, manager of the Lemanik Asian Opportunity fund at Lemanik

Regional economic data continue to point to a weakening of inflation. This will give central banks the room to lower interest rates further if the economic situation were to deteriorate because of the current discussions on tariffs with the United States. The Asian Dollar strengthened further over the month, while the U.S. dollar weakened against most currencies. We view this development as positive for Asian equity markets. Front-loading of export orders will likely translate into weaker Asian industrial production in the months ahead. It will be important for the region to see a recovery in Chinese consumption, since intra-Asian trade is larger than Asian exports to the rest of the world.

The global geopolitical situation deteriorated in June, when Israel attacked Iran and the United States bombed Iranian nuclear enrichment sites. However, Iran's weak response, after already being weakened by the loss of its influence in Syria and the destruction by Israel of its allied partners Hezbollah and Hamas, led investors to hope for a limited economic impact. Oil prices reversed their initial rise within a few days, as further evidence of investors' broad view that this was a minor event.

In the month under review, we partially reduced exposure in Thailand because of the ongoing political crisis. The proceeds were reinvested in Hong Kong and Japan. We expect volatility to rise in July, as few trade agreements were signed during the 90-day period that expired on 9 July. The unpredictability of U.S. trade policy remains the main source of uncertainty for global markets. We remain constructive on Asian equity markets from a fundamental and valuation standpoint.