Buttonwood
Asia’s stockmarkets fall out of favour
May 18th 2004
From The Economist Global Agenda
SourceLast year investors lapped up Asian shares. Now, it seems, they have had their fill, despite the region’s economies being in pretty good shape
BUTTONWOOD spent a small part of Sunday delving into “Galahad at Blandings”, a novella by the incomparable P.G. Wodehouse. Contained in the opening paragraphs is this gem: “There had occurred that morning on the New York Stock Exchange one of those slumps or crashes which periodically spoil the day for stock exchanges.” By coincidence, the morning after your columnist had reluctantly placed the book on his bedside table, a newsreader announced that Indian stocks had crashed. All great truths, it struck Buttonwood forcibly, are universal.
Their day spoiled and their exchange shut temporarily by the authorities, the members of the Mumbai Stock Exchange, not normally a breed given to public outburst, took to the streets in protest. When the market opened again, government-owned institutions bought heavily, and shares rebounded. Having fallen by 17% at one point, the market finished down 11%. By Monday’s close, Indian shares were some 30% below their peaks of earlier this year, spooked by a combination of local and international concerns. But it is not just in Mumbai that investors are glum. The mood in financial circles across Asia seems to darken by the day.
It is true that Tuesday was a good day for the region’s stockmarkets: Hong Kong, Japan, China, Singapore, South Korea, Malaysia and Thailand, as well as India, all clawed back some of their recent losses. But generally speaking, the change from last year and earlier this year, when the mood was so bright, could not be starker. Then, low dollar interest rates propelled a tidal wave of money around the world in search of higher returns. Asia became a magnet for foreign money, largely thanks to the lure of China’s rapid expansion. Portfolio investment in Asian shares and bonds rose to $29 billion last year, from $3 billion the year before. Asian shares reached a point 72% above their lows of 2002.
India, of course, has its own charms, but it attracted money too, from a particular sort of investor who thought it would be the next China. Between April last year and March this year, foreigners poured perhaps $10 billion into Indian shares, and from recent trough to peak (in January this year) Indian shares more than doubled.
The panic in Mumbai on Monday was sparked by domestic politics—namely the defeat of the ruling, reformist BJP in the marathon general election that ended late last week. Investors fret that the new coalition government, centred on the Congress party, will have to rely on the Communist party, not known for its sympathy for business, to stay in power. Hedge funds, those footloose pariahs of the international investment community, are apparently unwilling to stay around long enough to find out. Reuters reported one stockbroker as saying that they were selling at any price, a decided change of heart from last year when they seemed to be buying at any price.
But disenchantment with Indian shares also reflects wariness of risky assets in general and Asian shares in particular. An index of Asian shares produced by Morgan Stanley Capital International fell by 3% on Monday, to its lowest point since November. According to data from Nomura International, more than $5 billion has flowed out of Asian stockmarkets in the past three weeks.
Four fears weigh heaviest: the tense situation in the Middle East and more general concerns about terrorism; a surging oil price (Asian economies are especially intensive users of energy); the threat of higher interest rates in America, which would lessen the need for investors to seek higher returns elsewhere; and, last but by no means least, a fear that the Chinese authorities will pour cold water on the country’s overheating economy. As the region’s economies benefited from China’s rude health, so they will catch a chill when China does. The Economist’s man in Delhi says that when he arrived in India some 18 months ago, everyone was worried about China’s success; now everyone is worried about its failure.
These worries are unlikely to go away any time soon. The war in Iraq shows no sign of ending; the oil price remains stubbornly above $40 per barrel; the Federal Reserve has yet to put investors out of their misery by raising rates; and it is anyone’s guess what will unfold in China. Still, for Asian equities at least, the fears seem overdone. Granted, economic statistics generally reflect what has been, and markets are supposed to predict what will be, but the numbers coming out of Asia show scant sign of a region in economic distress.
Last Friday, China announced that retail sales had risen by 13% year-on-year in April, though inflation crept up to 3.8%, its highest for seven years, and the central bank said that lending to a few particularly hot industries would be restricted. But the situation is nowhere near as bad (not yet, anyway) as it was in the mid-1990s, when GDP grew by around 14% and inflation reached 28%. Just as investors were too optimistic on the upside, they are perhaps too pessimistic on the downside.
This is particularly true of Japan, a country whose stockmarket Buttonwood had tipped for greater heights, but which, as the favoured Asian play of many foreigners, has instead sputtered. This scribbler is not deterred. Most economic statistics point to an economy growing at a fair old clip. According to figures released on Tuesday, Japan’s real GDP grew by an annualised 5.6% in the first three months of the year; deflation is easing; Japanese companies are raking in cash and paying off their debts; and the big banks have eaten away their mountain of bad loans. Moreover, the stockmarket is relatively cheap: the Topix, a broad index of Japanese shares, trades on a modest 14 times last year’s earnings and 1.4 times book value. A bad few days need not spoil the whole year.