Asia investors dive into stocks pushing volumes toward record

A pedestrian rides an escalator past an electronic screen and ticker board that indicates stock figures at the Singapore Exchange Ltd. (SGX) headquarters in Singapore. (Bloomberg pic)

SINGAPORE: There’s a slew of reasons not to buy shares in Asia right now: trade war uncertainty, global growth worries and slumping profit estimates.

But stockbrokers aren’t exactly lacking for business.

The average daily trading volume on the MSCI Asia Pacific Index has jumped 58% so far this year to about 21 billion shares – on track for a record high – despite the concerns. Market watchers have pointed to one key factor – dovish central banks.

“Traders increase bravado to play the mean reversion trade even when things look dire,” said Stephen Innes, managing partner at Vanguard Markets Pte. “It tells me that the investors have the view that central banks will ride to the rescue and frankly, they have called it right.”

Federal Reserve Chairman Jerome Powell moved closer to a rate cut last week, removing a previous pledge to be “patient” in the central bank’s statement. And across the Pacific, Australian policymakers said another cut is “more likely than not,” while Indonesia left rates unchanged but left the door open to ease at some point.

“The core of this is liquidity,” said Kyle Rodda, an analyst at IG Markets Ltd. The consequence of policymakers’ attempts to stave off a slowdown is “greater financial capital washing around markets, which has flowed into riskier asset classes like equities,” he said in an email.

A shares

Others have suggested the addition of more than 200 Chinese large-cap domestic stocks to MSCI Inc.’s indexes earlier this year as another reason for the increased trading volume. The inclusion of these so-called A shares – which were historically available only to Chinese investors – is a stamp of financial credibility that will open China to more global investment. MSCI had long rejected the inclusion of A shares until finally approving them last year.

The average daily trading volume in the Shanghai Composite Index has risen almost 90% this year, according to data compiled by Bloomberg.

While trading of the top five constituents of the MSCI Asia Pacific Index – Tencent Holdings, Alibaba Group, TSMC, Samsung Electronics and Toyota Motor – has remained relatively stable for the last five years, the additional volume may have come from the “bottom tiers, boosted by index shuffling such as MSCI’s,” said Margaret Yang, strategist at CMC Markets Singapore.

“Passive funds like ETFs and mutual funds tracking the index will have to reshuffle their portfolio accordingly,” leading to a boost in trading, she said.

Volatile year

Increased volatility, such as that sparked by President Donald Trump’s unpredictable Twitter posts on tariffs, has also played a role.

“Fund managers might need to reposition their portfolios to reflect many changes in the global macro environment – interest rate outlook, US-China trade and technology spat, a potential shift of global manufacturing hub out of China,” said Yang.

Summer lull

Still, this week paints a different picture. Investors have stayed on the sidelines with lower than average volume for most major indexes in the build-up to the key G-20 meeting in Japan where Trump and China’s Xi Jinping are set to meet.

“Markets are quieter leading into this week’s G-20 meeting – as is always the case coming into any major risk event,” IG’s Rodda said. “But, we are coming off the back of a month where risk-taking has been stoked by increasingly dovish central bankers across the globe. Even more than trade, monetary policy will drive market behaviour above and beyond anything else.”