Bank stocks led the decline on Tuesday, causing Asia-Pacific’s primary index to erase its year-to-date gains and become flat in 2023. The MSCI Asia Pacific index dropped to 155.44 during afternoon trading, which is more than a 9% decrease from its peak of 171.26 on February 2 and wiped out its gains for the year. 

In contrast, it ended the last trading day of 2022 at 155.74. China’s reopening optimism fueled a bull market in the index during the second trading week of January. MSCI’s broadest index of Asia-Pacific shares outside of Japan also hit new lows for the year, down 1.47% on Tuesday afternoon. Despite near-term volatility, traders last month saw potential for the index to rally further.

Even after U.S. regulators intervened over the weekend to protect depositors, concerns about the impact of Silicon Valley Bank’s collapse continued to weigh heavily on the markets, causing sharp losses on Tuesday. In a note on Tuesday, IG analyst Yeap Jun Rong said that fears of a global economic downturn were putting pressure on the region, which is more focused on value. 

The decline of bank stocks in Japan on Tuesday led to a sell-off in the wider Topix index, which closed 2.7% lower, with financials falling 4.65%, according to Refinitiv data. Shares of Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group fell sharply, as did those of SoftBank Group. 

Yeap also pointed out that indexes like Singapore’s Straits Times Index have nearly 45% of their weightage in bank stocks. On Tuesday, shares of DBS, United Overseas Bank, and Oversea-Chinese Banking Corporation led the declines. The Monetary Authority of Singapore said on Monday that its exposure to failed U.S. banks was “insignificant,” and that banks in Singapore were well-capitalized, conducting regular stress tests against interest rate and other risks, and had healthy liquidity positions supported by a stable and diversified funding base.

Nomura’s equity strategists, including Chetan Seth, have restated their February call and continue to anticipate further gains for the index despite recent market turmoil.

In a note published on Monday, the strategists stated, “Although we do not believe that there will be any significant fundamental impact on Asian stocks from US banking sector issues, there is always the risk of some skeletons emerging from the closet.”

Seth added, “We are inclined to believe that these issues will not be systemic to the health of the banking sector.”

Societe Generale’s Head of Asia Equity Strategy, Frank Benzimra, stated that the increase in systemic risk is frequently regarded as part of a pattern at the end of a Fed cycle.

Benzimra said, “When inflation rises, the first order effect is higher rates, the second being a rise in systemic risk – the SVB episode is part of this framework,” and added that threats to financial stability “typically occur at the late stage of the Fed cycle.”

He also stated that SVB is a “special situation” in terms of its funding and is not subject to coverage and funding ratios (LCR/NSFR rules), and MBS/UST portfolios being Available-For-Sales.