Asian equities win in US recession

If a recession materialises in the United States this year, the relative performance of US and Asian equities will likely be quite different from what investors have seen in past decades. Indeed, the latter may be the “risk-off” trade this time around.

- Manishi Raychaudhuri

The US economy contracted modestly in the first quarter, based on the estimate released on Wednesday. While that's only one quarter of negative growth, there are other nascent signs that a US recession could already have started.

Consumer confidence is plummeting. In April, the University of Michigan's Consumer Sentiment Index touched the lowest point in the past 35 years, excluding the brief pandemic-related trough.

A second time-tested leading indicator of recession is the inversion and subsequent steepening of the Treasury yield curve. In the past 50 years, the difference between the US 10-year and 2-year Treasury yields has almost always turned negative and then positive before a recession ensued. We're seeing that play out now.

THIS TIME IS DIFFERENT

US equities have suffered less than their Asian counterparts in all but one of the four recessions since Asian equity data became available in 1990. Again, the exception was the brief Covid-19 downturn. The deepest recession, which occurred during the 2008-09 Global Financial Crisis, saw the highest outperformance of the S&P 500 Index versus the MSCI Asia ex Japan Index, even though the epicentre of the crisis was in the US.

This behaviour is largely explained by the fact that recessions increase risk aversion among investors, causing funds to flow towards “safe haven” assets, which typically means moving away from emerging markets.