Beware the Asian equities bust-up
For all the drama on Wall Street, US stocks are scarcely in bear territory yet. The Dow Jones Industrial Average is down only 13.8 per cent this year. In contrast, Asian equities are the world’s worst performing stocks.
View PDF
View PDF
Comments
By Goh Eng Yeow
15 September 2008
LAST year, as the sub-prime mortgage crisis erupted in the United States, it became fashionable for analysts to suggest that Asian markets had successfully decoupled from Wall Street.
Not any longer.
Just look at the debilitating effect on Asian markets of the latest high-profile victim of the financial crisis, US investment bank Lehman Brothers, as it struggles to stay afloat.
The manner in which the unfolding drama has gripped investors’ attention in this part of the world has actually driven stocks down further than in the US itself.
At the same time, rising regional turmoil is also battering bourses here.
Take some recent regional developments: the won plunging headlong against the greenback on fears of South Korea’s soaring trade deficit, and opposition leader Anwar Ibrahim’s efforts to unseat the Malaysian government.
Sound familiar? This looks like something of a replay of similar events from 1998 when the Asian financial crisis was at its height.
For all the drama on Wall Street, US stocks are scarcely in bear territory yet. The Dow Jones Industrial Average is down only 13.8 per cent this year.
In contrast, Asian equities are the world’s worst performing stocks. Shanghai has plunged 60 per cent, Hong Kong has fallen 30 per cent, while Singapore is down 26 per cent. Malaysia has fallen 28 per cent, while Thailand is down 24 per cent.
While the US sub-prime crisis is partly to blame for the lacklustre performances of regional bourses, there are also negative local factors to dampen investors’ risk appetite.
For a well-developed market such as Singapore, what is worrisome is the ‘rough ride ahead’, as DBS Bank succinctly described the outlook for market conditions in a report last week.
Non-oil exports fell in the second quarter, as ‘persistent weakness in global demand weighs down on the growth outlook’, the bank said, cutting its economic growth forecast for Singapore this year from 5.1 per cent to 4.2 per cent.
But elsewhere, it is political problems even more than economic ones that are taking a big toll on stock markets.
The Thai stock market, for instance, is being weighed down by political uncertainties besetting the country.
For many investors, the only consolation is that after the lessons learnt from the Asian financial crisis, the region is now better equipped to deal with any turmoil that may erupt. Giant economies like China now sit on more than US$1 trillion (S$1.4 trillion) of foreign reserves.
The recent sharp fall in oil prices may also help to keep a lid on the alarming price increases experienced across the region earlier this year.
One observer noted that Singapore stocks trade at a historic price-earnings (PE) ratio of only 10 times, or at levels last experienced during the Asian financial crisis, and after the Sept 11, 2001 terrorist attacks on New York and Washington.
‘Singapore is being sold down to crisis valuations when there is no crisis,’ he argued.
Does that make buying Asian equities a good proposition? Not necessarily.
One analyst points out that using historic PE as a yardstick assumes that Singapore firms will continue in future to enjoy the same rosy earnings that they have notched up in recent boom years.
But that is not possible because companies’ earnings are likely to be hit as the economy slows down.
Also telling: Last Monday, as stock markets around the world rallied sharply after the US government bailed out troubled mortgage giants Fannie Mae and Freddie Mac, Shanghai fell by as much as 4 per cent, spooked by concerns over China’s version of a property meltdown.
The New York Times reported last week that in some parts of China, property prices have fallen by up to 40 per cent, while the volume of property transactions has crashed by two-thirds.
So while the high drama on Wall Street may have temporarily captured investors’ attention, it would be best to keep a weather eye on a possible emerging mortgage crisis brewing in our backyard.
That can’t be good at all for regional equities markets.