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A trader at a foreign exchange dealing room in Seoul. The MSCI Asia Pacific Index is headed for a third straight week of declines — the longest stretch this year. Image Credit: AP

Hong Kong

Asia investors looking for a bottom to this month’s market sell-off may have to wait a little while longer, with stocks set to hit yet another dubious marker.

The MSCI Asia Pacific Index is down 0.2 per cent following losses in New York overnight, with declines in Japan and Korea offsetting a modest advance in Hong Kong. That has put the regional benchmark on track for a third straight week of declines — the longest stretch this year.

Asia Pacific stocks have erased more than $2.6 trillion in value from a mid-April peak through Thursday, according to data compiled by Bloomberg. The majority of those losses come from China and Hong Kong — epicentres of the renewed trade and tech war with Washington. Still, every major market in the region has seen declines over that period, with Indonesia the first to erase losses for the year and South Korea on track to join suit today, the data show.

With optimism of a US-China trade deal this year starting to fade and investors flocking to safer parts of the market driving Treasury yields to multi-year lows, attention now turns to assessing the potential extent of the damage from the conflict.

“With markets expecting a trade deal, renewed trade friction has hit hard,” Goldman Sachs Group Inc strategists including Timothy Moe said in a note to clients. “A protracted trade dispute raises risks to earnings.”

Based on Goldman economists’ estimates for a potential 1.7 per cent hit to China’s economic growth, a no-deal scenario by 2020 could see cumulative earnings growth reduced by 13 per cent for stocks in China and 8 per cent for shares in the MSCI Asia Pacific ex-Japan Index, the strategists said.

Potential downside

There is the potential for 20 per cent downside for Chinese shares and 17 per cent for the broader ex-Japan benchmark, as well as 23 per cent downside for the Shanghai Shenzhen CSI 300 Index, assuming no policy response to offset slowing growth, the report said.

For China, cyclical industries including autos, consumer discretionary, industrials, energy and materials show the greatest risk to earnings, the report said. Outside China, the risks are highest for materials companies in Taiwan, Korea and Australia, as well as tech hardware firms in Taiwan.

“While we still view an agreement as more likely than not given incentives on both sides to defuse trade tension, the risk to this is clearly to the downside, either in a slippage in the timing of an agreement or in a protracted period of higher tariffs,” the strategists said.