US rate cuts no balm for Asian investors’ pain

Hong Kong, Aug 26: Death by a thousand cuts? It may feel like it to Asian investors who seem to see seven slices to US interest rates this year confirming the view that things are getting worse, not better.

Real US interest rates flutter just above zero after the Federal Reserve lopped another 25 basis points off rates last week, taking them to a seven-year low of 3.5 per cent. But rather than triggering a rush for higher yielding assets like those in Asia in the hope that lower financing costs signal a global economic recovery, the cuts have sent investors scurrying for the safety of risk free assets.

"It’s quite interesting that you’ve now got the world’s two major economies with roughly zero real interest rates. It shows how sick the world is," Warren Mar, head of Asian fixed income research at BNP Paribas in Hong Kong, said.

That sickness is evident in equity market performance. Almost every major stock benchmark in the US, Europe and Asia is tinged an unhealthy shade of red, evidence of the billions of dollars lost from the value of investors’ portfolios.

So far this year the Dow Jones Industrial Average is down 3.4 per cent, the S&P 500 down 10.3 percent, the UK’s FTSE has lost 12.1 percent, Germany’s DAX is off 16.3 percent, Japan’s Nikkei 225 has sunk 19 percent, while Hong Kong’s Hang Seng underperforms the lot -- down 26.4 percent. US Treasury yields have followed stocks down, with two-year notes -- appetite for which is the barometer of aversion to near term risk -- this month sinking to their lowest yield since their 1972 launch as investors opted for safety and piled in.

All this signals that a simple scything of interest rates can no longer be relied on to get investors back into the markets, especially in Asia where much depends on external factors. "For the moment rate cuts appear to have lost their potency," LiLian Ong, regional economist at Macquarie Bank, said.

(Reuters)