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September sell-off pulls Asian equities' 2020 performance back into the red

Asian equities fell in September for the first time since March, erasing this year's gains even as the region showed signs of continued economic recovery.

The MSCI AC Asia-Pacific All Cap Index, which tracks nearly 7,000 companies across 14 markets in the region, fell 1.24% in September amid a broad sell-off that also extended to global stocks and commodities.

The index has now lost 0.34% so far this year, just a month after the gauge's year-to-date performance turned positive for the first time in August.

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Despite the return to negative territory, some brokers remain optimistic on Asian stocks as 2020 nears the finish line amid signs of a global economic recovery.

British asset management firm Schroders upgraded its view of stocks in Asia-Pacific, citing expectations that economies in the region will continue to recover from the coronavirus pandemic, supported by fiscal and monetary policies and hopes for a vaccine.

Japanese equities tick up

Nearly all Asia-Pacific equity indexes tracked by S&P Global Market Intelligence registered declines in September. Japan's Nikkei 225, one of the only two indexes to rise last month, eked out a 0.2% gain as Yoshihide Suga took over as Japanese prime minister.

Observers expect Suga to continue with Abenomics, the signature package of policies spearheaded by his predecessor that aims to revitalize the Japanese economy through monetary easing, fiscal stimulus and structural reforms. Any signs of policy tightening under Suga's rule may lead to a sharp appreciation of the yen, which would likely have a "non-negligible impact" on stock prices, Shigeto Nagai, head of Japan economics at Oxford Economics, wrote in a Sept. 14 note.

The Japanese index is down nearly 2% this year, while benchmarks from China, South Korea and Taiwan remain in positive territory.

The Shanghai Stock Exchange Composite Index logged its first monthly fall since May, shrugging off continued signs that point to a recovery in the world's second-largest economy.

Among the most notable equity movements in September was Semiconductor Manufacturing International Corp., which plunged 27.2% amid reports that the U.S. government had imposed export restrictions on the company. SMIC, China's largest chipmaker, adds to a growing list of companies that have been caught in the crossfire of deteriorating relations between Washington and Beijing over a wide range of issues that include trade, national security and COVID-19.

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Tensions between the U.S. and China are expected to continue regardless of who wins the White House in November, according to analysts. "Even with a change of a president, it will only change the style of negotiation, not the direction of outcome," UOB said in its latest quarterly global outlook report.

"Both Republicans and Democrats have a unified view of China, and this is reflected by the near unanimous passage of bills against China, on individuals, companies and the country," the Singapore-based bank added.

Thai stocks underperform

Thailand's SET 50 lost nearly 7.5% in September, taking its year-to-date loss to approximately 27% and overtaking the Philippines' PSEi Composite Index as the region's worst performer so far in 2020.

While Thailand has been frequently cited as one of the most successful countries in handling COVID-19, its tourism-reliant economy bore the brunt of travel restrictions across the globe, with zero inbound tourists recorded for every month since April. Anti-government protests have also weighed on investor sentiment.

"Local financial markets are finally coming to terms with these dire economic and political conditions," wrote Prakash Sakpal, senior economist for Asia at ING, in a Sept. 10 note, adding that Thai equities "have stopped chasing the global emerging markets rally" since June.

"Unlike the rest of the emerging region where the disconnect between positive market sentiment and weak economic fundamentals still holds, the performance of Thai financial assets now seems to be more in sync with the underlying fundamentals," Sakpal added.

Aside from Thai stocks, Southeast Asian equities are among the worst-performing this year, with benchmark indexes from Singapore, the Philippines and Indonesia all more than a fifth below their 2020 starting value. Malaysia's FTSE Bursa 100, meanwhile, is down 4.1% in 2020 following a 2.1% decline in September.

"Looking ahead, we expect a bottoming phase within ASEAN equity markets in the months ahead with a modest recovery bias as we approach 2021," Kenneth Tang and Yeu Huan Lai, senior portfolio managers at Nikko Asset Management, said in a Sept. 28 investment note. "However, we expect the region's economic recovery post-COVID-19 to be longer and more gradual, as compared to other recovery periods, such as in 2009 and 2004."