The risk of the biggest US equities correction since the March low on the S&P500 has increased over the past week — but Asian economies, after a comparatively resilient year, are better placed than usual to resist an S&P-correlated correction, notes CLSA’s Christopher Wood in his latest Greed & Fear newsletter.
The observation feeds into a growing debate about the region’s vulnerability to market developments elsewhere — and comes amid warnings of asset price bubbles. The World Bank, for example, said earlier this week that inflationary pressures could force east Asian central banks to tighten monetary policy “sooner rather than later” to choke off emerging asset bubbles, and noted that such concerns were being reinforced by a rapid increase in equity and house prices across the region, notably in China, Hong Kong and Singapore.
However, as the FT reported, the Bank said that before raising interest rates, monetary policy was likely to be tightened by “removing some of the support for liquidity in domestic and foreign currencies . . . returning reserve requirements to pre-crisis levels . . . and scaling back the scope for collateral eligible for accessing central bank facilities”. So, is Asia in the grip of a bubble or just enjoying a healthy reaction to excessive gloom and doom of the end of last year?, the FT’s Kevin Brown asks in a separate report.
No one really knows, but some governments and central banks are taking limited pre-emptive action just in case, he adds.
Ahead of next week’s Apec leaders’ summit in Singapore, Vikram Nehru, the World Bank’s chief economist for the east Asia and Pacific region, warned that Asian governments might have to act before full recovery from the global crisis was assured, and while some in the region will have the fiscal space to sustain stimulus spending until recovery is on a firmer footing, the “time to begin removing monetary accommodation may come earlier”, given concerns about asset price bubbles.
In an update to its outlook for east Asia and the Pacific, the Bank raised its forecast for economic growth this year by 1.4 percentage points from its April estimate to 6.7 per cent. The region posted 8 per cent growth in 2008, and the Bank now expects growth to return to 7.8 per cent in 2010 - although it emphasised that the outlook remains strongly influenced by China, where the projected increase in GDP this year would offset three-quarters of the decline in GDP in the US, the eurozone and Japan.
In this respect, CLSA’s Wood says it is also worth noting the US stock market’s “less than exuberant response” to the seemingly better ISM data point announced on Monday, adding that the stock market may have been focused on the fact that the new orders component of the ISM index has declined for the past two months. CLSA’s technical analyst Laurence Balanco is also of the view that the risk is now of more of a correction back to the 200-day moving average, which would take the MSCI AC Asia ex-Japan index down by 18 per cent to 373, compared with the present level of 454.6, he notes.
Still, in Wood’s view, any further correction now in Asia would be less in percentage terms than if the S&P 500 “melts up” into the 1,200 level at year end. The hope, he says, is that Asia “will not perform as badly as normal in any S&P500 correlated correction for the simple reason that Asian economies have demonstrated so much resilience this year in terms of their domestic demand in the context of the current US downturn”.
And of all the Asian economies, Wood favours India. He explains:
One of the economies which has displayed that resilience, and it should be noted without the benefit of China’s command economy gymnastics, is India. In short, India remains GREED & fear’s favourite long-term equity market in Asia with the economy’s unique (by Asian standards) domestic demand focus. It also remains complementary to China in an Asian equity portfolio, because the two investment stories are, in almost every aspect, so completely different from each other.
Related links:
Asian economic weather map - FT
Asset bubble warnings, international monetary institution edition – FT Alphaville
China is `the most obvious area of concern’, Fitch says – FT Alphaville