Asia has been hard hit recently as investors take profits from the region, with last year's star per...
Asia has been hard hit recently as investors take profits from the region, with last year's star performers, such as India and Indonesia, bearing the brunt of recent selling.
Even so, the India Sensex as at 23 May 2006 was up 11.6% so far this year, having fallen almost 18% from its peak on 12 May, while the Jakarta Composite index was up 21.6% from the same time last year. Anyone who bought Indian shares 18 months ago would have doubled their money.
However, at a fundamental level investors should still like what they see. True, the easy gains have been made across Asia as the markets have been re-rated. But earnings growth is holding up, companies are being sensible with capital and the traditional signs of froth - investment in non-productive or trophy assets - are nowhere to be seen. The incipient bubbles, if they exist are probably thematic such as initial public offerings or resource stocks which can be seen just about anywhere.
Furthermore, Asian governments have been diligent, and even brave, reining in spending, freeing up fuel subsidies and slowly allowing their currencies to appreciate. With current accounts in surplus, most have room to spend if economies do weaken and a counter-cyclical lift is needed.
However, this does not appear necessary. In fact, rising export and domestic demand have underpinned growth across Asia, with two of the region's largest economies, China and India, expanding at a healthy pace. Consumer confidence is mirrored in asset reflation in Hong Kong and Singapore. And in the more rural economies such as Thailand and Indonesia, where rising fuel prices have hurt most, the commodity boom has cushioned the impact.
Japan's economy has also picked up. Corporate restructuring, low interest rates and buoyant export growth have helped the nation pull out of its decade-long deflation. A recovery in consumer spending and employment has also underpinned sentiment.
However, Asia still faces its bouts of political uncertainty. In Thailand, fresh parliamentary polls are scheduled for 15 October after the constitutional court nullified April's elections, which means the country could spend much of this year in administrative limbo. Japan's ruling Liberal Democratic Party will face leadership elections in September to determine prime minister Koizumi's successor. China-Taiwan relations are once again strained and both Malaysia and Indonesia's new administrations have enacted the odd bold reform but leadership has been lacking.
The broad causes for concern are familiar by now, and include a heightened risk of inflation which will lead to tighter monetary policy, a weaker dollar and worries over global economic growth. If the US economy slows down it could prove disastrous for the demand of products from Asia.
However, long-term investors in Asia should not to be alarmed and should still be keen buyers of favoured stocks. It is likely the focus will shift from big picture concerns back to economic and corporate fundamentals, where the region holds many advantages. In the meantime, volatility is likely to continue because of renewed risk of risk aversion.
Investors taking profits from Asia
Slowdown in the US is a risk to Asia
Stock volatility to continue for the short term
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