SINGAPORE - Asia's currencies are rallying more than the region's equity markets, providing a "tailwind" for domestic-related stocks to outperform exporters, UBS AG said.
Rising local currencies have contributed to more than half the total US dollar returns in Malaysia, South Korea, the Philippines, Singapore and India so far this year, UBS strategist Niall MacLeod said.
That's the first time since at least 1988 that foreign exchange gains "mattered more" than the underlying share price increases, he also said.
"Currency appreciation tends to lead outperformance by domestic stocks over exporters," MacLeod wrote in a report on Wednesday.
"Since early last year, exporters in general in the region have been outperforming domestic stocks, something we expect to reverse, given the likely ongoing tailwind of domestic currency appreciation."
The yuan and the Hong Kong dollar held little-changed since July 2008, are the only two among the 10 most actively traded Asian currencies outside of Japan that haven't strengthened against the dollar this year.
UBS estimates that the yuan and rupee may advance the most this year. The Indian currency, the Philippine peso and South Korea's won are furthest away from their highs reached before the collapse of Lehman Brothers Holdings Inc in September 2008, the brokerage said.
Shares in the Philippines and India will beat South Korea, given a "greater domestic component" in their benchmark stock indexes if all three nations see their currencies appreciate, MacLeod also said.
Almost half the revenue generated by the 97 stocks in the MSCI Korea Index comes from outside the nation, compared with 35 percent for the MSCI India Index, according to the note.
Bloomberg News
