Asian markets performed well at the beginning of the year, aided by interest rate cuts by the US F...
Asian markets performed well at the beginning of the year, aided by interest rate cuts by the US Federal Reserve. This was in stark contrast to the poor time Asia had last year while US interest rates were rising and growth was showing signs of a slowdown.
The MSCI Emerging Far East index rose 14.19% in dollar terms in the first two months of the year while for the 12 months to April 2001, the index is down 42.82%.
Volatility in the technology sector in the second half of 2000 drove investor sentiment down with negativity hitting the entire range of Asian markets rather than just tech-oriented countries such as Taiwan and Korea. But volatility in the sector is starting to abate and with interest rates down, analysts believe falling interest rates in the US should help the Asian economies.
Margaret Gadow, a senior investment manager at Gartmore, says: "The markets are still volatile but we've seen a good start to the year helped by the rate cuts in the US. In light of such macroeconomic shifts, many fund managers have been re-weighting their portfolios and moving into Korea and Taiwan."
Gadow says these two markets have rebounded most strongly as they were hit hardest through their high exposure to technology, but there are no signs of a recovery yet. "Nobody wants to take a bet when visibility is poor but banks and cyclicals should benefit from rate cuts," adds Gadow.
She also points out that energy stocks have been performing well, while telecoms and industrials have underperformed. On a geographical basis, she expects rate cuts to benefit Hong Kong, Singapore and Australia.
Director of the Far East desk at Zurich Scudder Investments, Vanessa Donegan, says although Asian economies are experiencing a slowdown in line with the downturn in global demand, the region should still outstrip the developed world in growth terms this year.
"The liquidity backdrop to the region's stock markets is improving as domestic interest rates are being slashed across the board," she says. "But the excess liquidity may not prove a catalyst for a re-rating of the markets until the earnings outlook improves."
Donegan says the state of the US and Japanese economies is clearly an important factor for many Asian markets. "The slowdown in the US is negative for export-driven markets such as Taiwan, Korea and Singapore," she says. "This group is likely to see their overall rate of growth halve this year. India and China, on the other hand, whose export to GDP ratios are relatively low, are unlikely to be affected to the same degree. Hong Kong is likely to benefit from lower interest rates in the US via the mechanism of the pegged exchange rate."
Matthew Dobbs, a Far East fund manager at Schroders, agrees that the short-term outlook for Asian markets is difficult and echoes that much depends on the underlying conditions in the US.
He says: "Cyclical markets in Taiwan and Korea have done well as a result of international investors being surprised at the timing of the rate cuts and looking to raise the risk profile in their portfolios."
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