Will Asian Monetary Policy be Incrementally Tighter than the US/EU?

Asia's response to COVID-19 and rapid economic re-acceleration has seen the region several quarters ahead of the United States and Europe in this new economic cycle.

Any quest for economic normality must eventually be accompanied by the removal of emergency policy measures which has kept investors more laser-focused than norma on the tome and commentary of central bankers across the globe.

Should we naturally assume that Asia will lead the world in return to a more "conventional" economic policy?

China has been draining liquidity, and we have evidence that activity is peaking. Regulations over Ant Group and the establishment of a bank holding company will temper their consumer credit activities as the fintech behemoth is forced to provide more capital against each liability. This is a defacto tightening in itself.

Politicians from Taiwan and South Korea are discussing asset bubbles. It is very clear that Asian authorities are taking the asset excesses of unprecedented global liquidity much more seriously than developed market peers.

While Asia worries about the potential for property market extremes, American politicians banter back and forth about why the little guy can't enjoy the spoils. I suppose that is their way of dealing with unmatched economic inequality.

In that case, the prospect of a US tightening of either fiscal or monetary policy is a long way away, and many in the political class, especially the newly emboldened Left of the Democratic Party, will fight any form of austerity.

This leaves us with a potential disconnect between Asian and Western Policy.

With Asian Authorities being much more focused on asset bubbles than the US or EU, are we about to see divergent monetary policy for the first time in many, many years?

Let us take this one step further: If the United States continues to embrace the corporate welfare state that underwrites investment-grade corporates through bond purchases, don't US equities outperform those countries who refuse to do the same?

If Washington is to conduct policy and runs twin deficits that will exceed 20% of GDP, how do Asian assets compete when domestic liquidity conditions are so much tighter? These are valid questions and must have consequences for asset allocation in the quarters ahead.

 I have several observations:

1.  Asian policy has been much tighter than the US and EU. So, from a relative policy standpoint, we are already living the aforementioned reality.
2. The Federal Reserve drives global risk assets and beta. The Fed is a rising tide that lifts all boats, and global assets will be supportive provided the Fed stays the course.
3. Policy tightening is relative. While China, South Korea, and Taiwan may tinker with policy, Asia doesn't have an inflation problem, and while some liquidity could be drained, a full-blown tightening cycle is a long way away. This tightening cycle would be most unlikely unless the Fed hinted it was moving in the same direction.

Policy divergence is rare—about as rare as long-term underperformance of US assets. Tighter Asian policy is a net drag on Asian assets, but a continuation of loose USD liquidity will swamp this and ensure continued asset strength across the globe.

Slightly tighter Asian monetary policy isn't a signal to sell emerging market exposures, but it should prompt you to re-think your strategy that it is time to dump US equities for the balance of the globe. Dumping assets comes when the Fed talks about tightening, not when Asia discusses it.

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