Three reasons global markets are being rocked

Asian stock markets are off to a bad start this week, with most major indexes plunging anywhere from 1-2 per cent. And the reasons aren't new: concerns over growth and escalating frictions between two of the world's superpowers.

The sell-off in global equities deepened in Asia hours after Chinese economic data released over the weekend signalled a further weakening of both domestic and international demand in November. Adding insult to injury, tensions have ratcheted up after the arrest of Huawei Technologies chief financial officer, with China's Vice Foreign Minister having summoned the US Ambassador to China in a protest over her capture on Saturday.

To Nader Naeimi, a Sydney-based fund manager at AMP Capital Investors, the recent market weakness has been "narrative-based" as opposed to "fundamentally based," and investors are in a "get-me-out-of-here mood."

With every single market in the red, Asia's benchmark MSCI Asia Pacific Index has erased November's 2.7 per cent climb and is heading to its lowest level since end-October. Australia was the worst performer in the region with Japan's, whose economy shrank more than forecast, while China's stocks dropped with the offshore yuan weakening for a fourth day. Futures on the S&P 500 Index tumbled as much as 1 per cent in the morning.

There's a host of negative factors:

1. Global investors may be more risk-averse as UK Prime Minister Theresa May must decide on Monday whether to put her Brexit deal to a vote in Parliament this week and risk a humiliating defeat that could plunge the nation into unprecedented political chaos. A top EU court said they UK can unilaterally reverse the Brexit process.

2. There's probably room for more capitulation when it comes to US stocks - hedge funds that had stocked up on American equities are still sitting on substantial inventory, and long-short funds' exposure to the S&P 500 is still well above levels that marked market lows over the past decade, according to Sundial Capital Research.

3. Recent worries over a US bond yield-curve inversion and outlook for oil prices haven't subsided.

AMP's Naeimi said his firm is trying to manage against the possible scenario of "things getting worse before getting better" and has been looking to add "risk-managed short tech positions" while maintaining a core exposure in beaten-up markets such as emerging assets, global energy and financials worldwide, he said.

So what's next? With global growth data mixed and the US-China 90-day trade-war truce, one market watcher doesn't see the situation significantly improving. "The realisation that this state of uncertainty is expected to prolong for much longer is unsettling markets and this all is not likely to go away any time soon," said Jingyi Pan, a market strategist at IG Asia. "Investors should evidently brace for more volatility to come and hedge the downsides."

Some strategists have started to call an end to trading in 2018 with equity volume expected to shrink as the year comes to an end. "For this week, trading will be biased downward," said Rachelle Cruz, an analyst at AP Securities Inc. "There is no catalyst to dissuade investors from taking in these risks, so any run-up will probably be short-lived and succumb to profit taking."

The China-US tension will weigh on the region while the U.S. extends its correction, Cruz said, adding it's no surprise if traders take out money from equities to invest in fixed assets with better yields.

What should investors do? Taking a break is a suggestion from Beyond Asset Management Company president Michael On.

"The China-US tension is worse than expected," On said. "Investors should be cautious, and are advised to lower their stock holdings to less than 50 per cent of assets, with the global GDP bottoming only in 2Q next year and China and the U.S. having a 90-day negotiation period."

"They should take a break and come back after the Chinese New Year holiday," he said.

To Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong, liquidity is another factor to watch around the holiday season, especially in Hong Kong where Chinese investors have a big exposure.

"Traditionally, Chinese funds tend to withdraw from overseas and go back to mainland in the year-end, and that will further weigh on markets," Pang said, adding that he says investors have given up hope for a December rebound.

- Bloomberg