US interest rate hike would not have a significant impact on Asian ex-Japan equities, unless it moves quickly than expected, according to fund managers.

Market volatility is likely to increase if rising US inflation causes the Federal Reserve to hike interest rates faster than expected, according to James Thom, senior investment manager for Asian Equities at Aberdeen Standard Investments.

While that could lead to a reversal of flows into Asian equities, Aberdeen Standard doesn’t anticipate major disruption from the rate-rising cycle or withdrawal of stimulus, chiefly because policymakers are taking a gradual approach.  

‘We would point to longer-term benefits as rate normalisation helps to repair distortion in asset prices after years of quantitative easing,’ he said.

Citywire + rated Paul Danes manager for Asia Equities at Martin Currie, concurs that rates are expected to go up slowly and gradually.

There shouldn’t be any sudden dislocations and Asian central banks will be able to take a measured approach to their own decisions based as much on their domestic situation as the impact of US policy on exchange rates and investment flows, he said.

‘In such a scenario, the likely impact will be to slowly put pressure on equity valuation levels, which have risen substantially across the region over the past 18 months,’ Danes said.

‘Overall, market returns will likely be guided by earnings growth rather than multiple re-rating as we have seen recently, he added.

Nevertheless, Martin Currie remains conscious that the impact on flows would likely cause exchange rate issues in countries running current account deficits if rates were to rise faster than expected, , Danes said.

Meanwhile, Citywire + rated Anh Lu manager for Asia ex Japan equity at T. Rowe Price, said Asian economies would only come under pressure if the US rates move too quickly.

‘Our base-case scenario is for a more measured and gradual “normalization” of US interest rates. In this environment, we see a minimal impact to Asia,’ she said.