SINGAPORE: South-East Asia’s bond and currency traders can afford to be less worried about a potential stimulus tapering by the Federal Reserve (Fed), with their markets better positioned to withstand external shocks this time around.

Massive foreign reserves and undervalued currencies could shield the region’s markets from a potential selloff if Fed chair Jerome Powell hints at tapering bond purchases at the Jackson Hole symposium this week.

While there’s caution, analysts aren’t expecting a repeat of the so-called 2013 taper tantrum where the Fed’s surprise announcement to unwind stimulus roiled global markets.

“Partly due to the taper tantrum in 2013, South-East Asia’s central banks now have better foreign-exchange-reserve cushions,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore.

“The degree of treasury curve steepening appears far more subdued this time around, which may be conflated with reduced pressure for capital flight out of emerging-Asia.”

Most South-East Asian currencies are undervalued, which reduces the risk of heavy foreign outflows in case markets turn risk-averse. The baht’s real effective exchange rate is 5% lower than the five-year average. The currency was 11% overvalued relative to its five-year mean before the taper tantrum.

The Philippine peso seems to be overvalued but by a smaller magnitude than in 2013. Additionally, the seven-day average spread of Indonesia’s 10-year bonds over similar-duration treasuries is around 500 basis points, which is wider compared to 2013.

 - Bloomberg