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Why Asia can brush off tapering next year: Invesco

Thursday, 26 Dec 2013 | 12:56 AM ET

The first mention of the word 'taper' earlier this year prompted a brutal sell-off across Asian assets, but now that the dreaded taper has begun, investors in Asia have no need to worry, according to investment firm Invesco.

Last week the U.S. Federal Reserve took its first step toward winding down its huge monetary stimulus program, announcing it would reduce monthly asset purchases by $10 billion to $75 billion starting in January, broadly in line with expectations.

After months of speculation, markets were unfazed by the event, with major indices actually rallying in response, in stark contrast to the 16 percent sell-off seen on the MSCI Emerging Market index seen from late May to June.

(Read more: Ding ding: Taper tantrum round two?)

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According to Paul Chan, chief investment officer of Asia ex-Japan at Invesco's Hong Kong office, tapering is nothing for Asian markets to fear.

"We believe the commencement of tapering near year-end helped to remove probably the largest uncertainty that haunted global markets in 2013... We are confident that Asia as a region can withstand the impact of an orderly tapering," said Chan in a note published Wednesday.

(Read more: Fed taper seen as positive for economy, bad omen for bonds)

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According to Chan, there are a number of reasons why Asia is better positioned to withstand the withdrawal of the Fed's easy money next year, in contrast to 2013.

Firstly, Asia's export sector is likely to be in a strong position next year, as it benefits both from the recovery in the U.S. economy and recent weakness in many Asian currencies making their exports attractive abroad, said Chan.

Chan pointed to the strong rebound in Chinese exports to 5.6 percent year-on-year in October, rising from a 0.3 percent decline the previous month, as evidence of this trend.

(Read more: Why Asian property investors may fear US taper)

Secondly, Chan alluded to the much discussed 'tapering not tightening' argument, and reiterated that although the Fed is reducing the size of its asset purchases, it is still pumping large amounts of stimulus into the global economy meaning the liquidity should remain supportive.

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"Asset purchase tapering simply means a smaller net addition of assets on the Fed's balance sheet, not an outright sale of assets. Liquidity within the global financial system should remain ample for emerging market assets," said Chan, adding that the Fed's commitment to an extended period of low interest rates provides an assurance of liquidity costs for Asian corporates, especially on short-term dollar denominated debt.

Finally, Chan acknowledged that further changes to the Fed's stimulus program could prompt some volatility in Asian equity and currency markets, but said any reaction would be driven more by sentiment than fundamentals, making it less damaging.

"Most Asian countries are now enjoying a much healthier level of foreign exchange reserves and the systematic risk of foreign currency denominated debt is significantly lower than pre-Asian financial crisis," said Chan.

(Read more: Traders watch out for the bond market grinch)

Furthermore, Chan added that the market correction seen in mid-2013 in some South Asian markets, has meant the fear of tapering induced capital outflows from these countries has already been priced in, bringing valuations to more reasonable levels.

"The realization of tapering commencement as well as well-managed interest rate guidance by the Fed should reduce the volatility in Asian equities as we celebrate the coming of 2014," said Chan.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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