Little reason for investors of Asian stocks to panic

Business Times - 25 May 2006


Little reason for investors of Asian stocks to panic

By WILLIAM PESEK JR

IT'S all a bit disorienting. Indian stocks, among Asia's star performers, are plunging, while Chinese shares, those perennial laggards, are surging.

It's a startling reversal of fortune by Asia's sexiest markets, and raises a question: Are investors really warming to the financial casinos that pass for Chinese equity markets, and throwing in the towel on India?

Economic fundamentals haven't changed much in either India or China in the past week. Just as the 38 per cent gain in China's Shanghai Composite Index this year may point to a bubble, the sudden gloom surrounding India is exaggerated in a similar way.

Asia is experiencing bubble troubles again, and a 1997-like enervation is coursing through markets. Two weeks ago, it was of a 1996 vintage; the sentiment was more about getting into hot markets than getting out. Now, as investors flee riskier assets, Asia's 1997 crash is again on traders' minds.

A crisis probably isn't afoot, though. This region has come too far and financial systems are much too upgraded for that. What's happening has more to do with global risk appetites that tend to steer clear of developing economies when things get dicey. With the US dollar falling and commodity prices getting wobbly, few can doubt the markets are shaky.

'Sell Asia, now!'

Amid all this, there's little Asia can do but hope that investors have shaken their pre-1997 mindset. Back then, many viewed Asia as one big economic bloc that produced the stuff consumers in richer nations use. When Thailand devalued its currency in July 1997, traders from New York to Johannesburg seemed to yell 'sell Asia, now!'

Considering Indonesia's experience of late, one could be excused for thinking how little things have changed. Traders the world over seemed to look at Turkey's market turmoil this week and conclude it was somehow related to Indonesia. The rupiah is down 5.2 per cent against the US dollar this month.

Even so, Asian markets were due for a retreat. One of the surest bets anywhere has been to buy any of the 19 commodities in the Reuters/Jefferies CRB futures price index. Another was to purchase Asian stocks. Rethinking both strategies will preoccupy hedge funds and investment banks for some time.

In Asia, part of the process will be to figure out which economies have the growth, leadership, resources, transparency and maturity to ride out the current storm in global markets.

Here, India's stock plunge relative to China's rally is a mystery. After a 42 per cent gain in the Sensitive Index (Sensex) in 2005, many thought Indian stocks were overpriced. Most likely, that's being rectified now (the Sensex this week fell below 10,000 for the first time in three months), and there's little reason to panic.

'Our Asian team has been expecting some kind of correction in spite of the long-term positive views we hold on the prospects for India's economic development,' said Paul Donovan, a London-based senior global economist at UBS AG.

The drop highlights vulnerabilities of India's market, including a lack of depth (just three companies make up almost a third of the Sensex) and the increased presence of hot money. Rapid economic growth, a maturing financial system and the calibre of India's policy makers are all reasons to think things will soon stabilise.

Perhaps the bigger mystery is the sudden wave of optimism surrounding Chinese shares.

No developing nation has gotten as much attention as China lately. Its 10 per cent growth, increasing international clout and the waves of foreign direct investment rushing its way continue to seduce governments, investors and corporate chieftains alike. It also can be argued that after a long period of lacklustre performance, China's share markets are playing catch-up. Yet the idea that a multi-year rally in Chinese shares is afoot lacks support from an important place: the underlying economy.

Touch of caution

'China's economy has too much liquidity, which is fuelling wasteful and speculative investments,' said Rob Subbaraman, a Hong Kong-based senior economist at Lehman Brothers Holdings Inc. 'The latest rate hike notwithstanding, the economy is still at risk of chronic oversupply, which could be followed by a hard landing.'

So if you believe that Chinese companies have suddenly cleaned up their act, banks can grow out of hundreds of billions of dollars of bad loans, the Communist Party can maintain social stability, risks of bird flu will go away and that pollution won't cause problems for Asia's No 2 economy, then by all means load up on mainland companies. A touch of caution seems in order.

India has its own challenges, and daunting ones at that. For all the talk in New Delhi about opening the economy, communists who help make up the coalition government are spooking markets. They're vowing to block policy changes that might increase foreign investment into Asia's fourth-biggest economy.

For all the gloom suddenly hovering over markets, Asia's economies are healthier than in 1997. Even if its markets fall, China's economy is likely to continue producing growth for its neighbours. Japan, by far the region's largest economy, is also growing, offering an important element of stability.

Questions about India and China aside, it's important to remember that Asia is a very different place than it was in the late 1990s. There's little reason for investors to panic. - Bloomberg

The writer is a columnist for Bloomberg News. The opinions expressed are his own.

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