Wealth and asset managers continued to pick through the consequences of the US central bank's rate cut last week and what the future may hold.

The Asia markets – excluding Japan – have already priced in predicted interest rate moves and the region is well positioned in coming quarters, T Rowe Price said in a commentary following last week’s 50-basis point interest rate cut from the US Federal Reserve.

Separately, Lombard Odier said the Fed’s cut meant that it was neutral on the dollar and more inclined to hold the Japanese yen and the Swiss franc.

“There is a general perception that a Fed pivot could spark a new market cycle. For Asia ex-Japan markets, the impact differs by country and arguably the impact is felt via the secondary effect of US rate cuts which would be a softening of the US dollar,” Rob Secker, portfolio specialist at T Rowe Price, said in a note on Friday. “Although markets have priced in some of the predicted rate adjustments, we believe Asia ex Japan remains well-positioned for the coming quarters, with ASEAN having benefitted the most so far.”

Secker said that in the past, ASEAN economies have been “highly sensitive” to US interest rates. 

“The recent period of higher US rates, allied to a strong dollar, resulted in the ASEAN region becoming less desirable as a destination for foreign capital. Going forward, lower US rates should ultimately make the region more attractive to foreign direct investment,” Secker said.

“Secondly, now that inflation is under control in ASEAN, they do not need to keep rates high to defend their FX [foreign exchange], so once the Fed cuts rates, central banks in the region will be able to start cutting rates as well,” he said. Easing monetary conditions and strengthening economies should be especially supportive to the region’s banks. Unlike in developed markets, mortgage and lending rates in ASEAN do not reprice significantly with rate changes. The net interest margins earnt by the banks have always been relatively high. From a technical perspective, the banks are often the largest companies in these markets therefore helping the performance of the markets at an index level.”

When the US central bank cut rates on Thursday, and issued its outlook, it was taken as a sign that the Fed is more comfortable about the path for inflation, and concerned to head off the risk of a recession.

Higher rates after the pandemic had jolted markets used to more than a decade of ultra-low rates and quantitative easing. A range of wealth managers have reacted to the Fed’s cut.

Secker said that in other parts of Asia, such as India, the relationship between these countries and US rates is “less notable.”

“India historically benefited from lower US rates and a weaker dollar, but this relationship has perhaps changed given the structural improvements we’ve seen in India’s economy over recent years allied to changing dynamics, namely the domestic demand, driving the Indian stock market,” Secker said. “China is going through an extended deleveraging process meaning monetary policy may not be as effective as in previous cycles.”

Secker added that a weaker dollar exchange rate gives China’s central bank more room to adjust rates to manage the economy.

Lombard Odier
Separately, Lombard Odier said it has turned neutral on the overall position of the dollar.

“With markets anticipating deeper Fed cuts compared with other central banks, the US dollar’s interest rate advantage is narrowing,” it said.

Lombard Odier added that it retains a cautious outlook on the euro and sterling.