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Virus Return a Scourge Once More as Markets Wake Up to Risks

Ishika Mookerjee and Lilian Karunungan
·3 min read

(Bloomberg) -- Just as Asia’s riskier assets looked set to benefit from an acceleration in the global recovery, the coronavirus has once again thrown a spanner in the works.

As new infections in the region shoot past global peers, the MSCI Asia Pacific Index has fallen out of the relative uptrend it had been in since September and underperformed the MSCI World Index by over six percentage points since the beginning of March. The Indian rupee, Japanese yen and Malaysian ringgit have all weakened between 1% and 2% since the end of February amid a resurgence in cases, while the Thai baht is down a whopping 3.7% over the same period.

Investors are growing worried that the jump in cases could lead to a reintroduction of lockdowns and stall the region’s recovery. India is responsible for the bulk of new infections, with daily cases in Asia’s third-largest economy hitting record-highs. In Japan, Osaka and Tokyo moved closer to states of emergency this week amid an uptick in cases and Malaysia’s infectivity rate hit a record on Saturday.

“We are concerned,” said Gary Dugan, chief executive officer of the Global CIO Office in Singapore. The market is potentially underestimating the “impact of the Indian variant on other economies” and the latest U.S. travel advisory shows the global economy is far from being on a clear path to recovery, he added.

U.S. stocks fell for a second day Tuesday and European shares slumped as the rise in worldwide cases led to renewed concern over their continued economic impact, overshadowing a batch of solid corporate results. The MSCI Asia Pacific Index was down over 1% Wednesday, its biggest decline in about a month.

In Asia, losses have been concentrated in areas under pressure from the virus, with Indian and Japanese shares leading declines this month. Meanwhile, Taiwan and Vietnam’s benchmark equity gauges are trading at record highs, thanks in part to their successful management of the pandemic.

Exacerbating investor concerns has been the slow rollout of vaccines in the region. The percentage of the population fully vaccinated stood at just 1.3% in India, 0.6% in Japan and 2.3% in Indonesia as of Tuesday, according to data compiled by Bloomberg. That compares to a figure of almost 26% in the U.S. and over 15% in the U.K.

Asia’s virus resurgence is weighing on some its stocks and currencies just as the rise in Treasury yields has eased and the rally in the dollar loses steam -- both traditionally positive catalysts for the region.

“The U.S. yields becoming sidelined has allowed other factors to play a role, and the differentiated pandemic impact is one of them,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.

(Updates prices, adds MSCI Asia Pacific Index performance in fifth paragraph)

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