Investors reeling from the market downturn should be heartened: Asia has suffered relatively little damage from America’s economic woes, and China’s continued spending boom assures all is not lost.
Investors in Asia endured a steep stockmarket slide during November, triggering fears of an incipient bear market in the wake of an extended share price boom. The MSCI Asia Pacific index, for instance, fell some 10% between November 1-22, worse than the 6% slide in the MSCI World index over the same period. Some markets fared particularly badly, such as those in China and Hong Kong, which shed 22% and 13% respectively over the same period. The extended stockmarket boom had “encouraged investors to take greater risks” and driven share prices to levels that were not compelling, said Martin Lau, the manager of the First State Greater China Growth fund, ahead of the big slide.
Analysts said the sell-off’s main cause was concern about the impact on Asia of American financial and economic woe. America remains a key export market, and a sharp slowdown there would undoubtedly have some impact on Asia’s open, trade-dependent economy, they added. America has been hit by record defaults on subprime mortgages given to borrowers with riskier credit profiles. The crisis has led to huge losses on securities backed by the loans, precipitated a major credit crunch, slowed the American housing market and darkened the mood of its usually spendthrift consumers.
Asian investors were also concerned by China, analysts said. Its economy is still booming, but the authorities are widely expected to continue to try to slow it, for instance by hiking borrowing costs again. Slower Chinese growth would curb expansion elsewhere in Asia.
A third concern centres on the high oil price, which at the time of writing was within touching distance of the symbolic level of $100 per barrel. However, some Asian nations subsidise energy costs, and many have seen their currencies rise in value against the greenback, helping to make crude a little more affordable.
A panoply of fears have thus damaged investor sentiment, but experts said a reasoned assessment suggested Asia could pull through better than the pessimism would suggest. For instance, Asian losses from the American subprime crisis are said to be relatively limited. Japan recently estimated its banks had lost $2 billion on securities backed by sub-prime mortgages – much less than the tens of billions written off in America. The relative importance of Europe as an Asian trading partner has also grown over the past few years, reducing some of the region’s reliance on America.
In the financial markets, the longer-term performance of Asian stocks remains positive: The MSCI Asia Pacific index rose 60% over the three years to November 22, and the Chinese market was up 217%. Ruth Stroppiana, an economist at Moody’s Economy.com, said expansion in Asia would hold up in 2008 despite an American slowdown. “Although softer consumer spending growth Stateside will dent the momentum in a number of Asian economies next year, a torrid pace of industrialisation and infrastructure building in China and India will underpin robust regional activity,” she said.
Asia has built up trillions of dollars in foreign exchange reserves, giving it a buffer against an American slowdown and the means to fund that major infrastructure spending, other experts have pointed out. China has more than $1.4 trillion in its reserves. The country also drives much intra-Asian trade – another bulwark against an American slowdown – and in fact is now Japan’s most important trading partner. “Disruptions in global financial markets have not yet had major spillover effects on the region’s economies. Despite slowing American demand, the Asian growth story remains intact heading into 2008. Intra-regional trade is robust, thanks to China’s huge appetite for production-chain components,” Stroppiana said.
Julian Jessop, chief international economist at Capital Economics, commented: “The recent strong performance of emerging Asian economies [including China, India and the larger South-East Asian economies] is likely to be severely tested by a US-led global slowdown in the next year or two,” he said. “But emerging Asia’s track record in the face of a slowdown in the advanced economies is actually pretty encouraging.” Asian growth held up “remarkably well” during the last big slowdown in America and the Group of Seven economies over 2001 and 2002, said Jessop. “What’s more, we are not expecting such a severe slowdown in the US this time around.”
A World Bank report published in November said it expected emerging East Asia to grow by over 8% in 2007 for a second year running, and to “moderate only slightly in 2008”. “Our projections for regional growth in 2007/2008 have been substantially increased compared to six months ago, mainly due to the unexpected and large domestic demand-led acceleration of growth in China,” it said. “There is a significant probability the subprime crisis, the associated credit squeeze and rising oil prices could force a more substantial downturn in the developed world, in particular in the US. This would lead to a more significant cyclical slowdown in East Asia. But a review of [its] performance in previous global downturns suggests the impact on East Asia is unlikely to be especially severe or protracted, given the region’s strong macroeconomic fundamentals and in the absence of a major downturn in global high-tech demand such as occurred in 2001.”
Yet while many analysts are optimistic about emerging or transitional Asian nations, the picture for East Asia’s biggest economy – Japan – is more cloudy. It contracted in the second quarter but managed to avoid recession by rebounding in the third. Yet some experts are sceptical that it has conclusively won its battle against overcapacity and deflation.
Lehman Brothers recently revised down its economic growth forecast for Japan from 1.9% to 1.7% in 2007, and from 1.9% to 1.4% for 2008. The MSCI Japan index, meanwhile, is flat since the start of the year, having given up earlier gains. “[Japan’s] financial markets now appear to be pricing in fairly dismal economic conditions in the period ahead,” said Hiroshi Shiraishi, a Lehman strategist.