Almost all
Asian markets rose during the month, but they were off their
intra-month highs, dragged down by a continuation of fiscal
uncertainties in Europe, and the spectre of a
weaker-than-expected US economic recovery. Top gainers in the
region were the smaller ASEAN markets like Thailand’s SET and
Jakarta’s JCI which rose 6.5% and 5.3%, respectively, in US$
terms. During the month, the Dow Jones fell 3.6%, and the Nasdaq
followed suit with a 6.5% decline. The US dollar was mixed
against Asian currencies with the Korean Won and the Indian
Rupee weakening by 1.6%.
Over the last
month, Asian markets have held up better than most developed
markets but this relative outperformance versus developed
markets is likely to disappear, in our view. In the near term,
markets may remain choppy and volatile, but it is increasingly
likely that the Eurozone-G3 fiscal deterioration will eventually
overwhelm the Asian recovery story. Meanwhile, Asian equity
markets have clearly not corrected sufficiently to reflect this
potential outcome. On the contrary, risk appetite is rising in
smaller ASEAN markets with many markets recently hitting 52-week
highs or all time highs.
Our cautious
tone has been shaped by the following factors. Firstly, the
outstanding macro issues of fiscal weakness and sovereign
indebtedness are better researched and understood by fixed
income or credit analysts/investors and less so by players in
the equity markets—as was the case in 2008. Second, recent
Eurozone-G3 economic data have been discouraging and reinforce
the idea that the economic rebound witnessed earlier this year
is fizzling out given the expiration of some government fiscal
measures. Third, G3 policy makers are not dealing with or not
able to deal with the current fiscal problems in a co-ordinated
manner given their respective fiscal problems. Following the
recently concluded meeting, the G20 communiqué made allowances
for countries to respond individually, depending on their
respective fiscal positions. With that, the Eurozone has
clearly pushed for fiscal consolidation while the US has pushed
for growth over fiscal austerity.
For Asian
stock markets to hold up against the Eurozone-G3 deterioration,
we foresee three possible policy actions: i) China must reverse
its current tightening stance; ii) Asian policy makers must put
renewed emphasis on a second round of fiscal stimulus; and iii)
Asian nations, with their high trade surpluses, must allow their
currencies to appreciate (we should caution that, traditionally,
Asian policy makers have weakened—and not strengthened—their
currencies during periods of global downturns in order to be
able to export more competitively). We believe that the
political will to make this happen may come only after equity
markets have corrected.
We continue to
hold a cautious view and can afford to be opportunistic during
these times of volatility. We prefer countries where valuations
have fallen below their historical mean which include Hong
Kong/China, Singapore and Korea. We will continue to seek for
value stocks in sectors that include selective commodities for
the play in China and India domestic consumption,
consumer-related play, as well as infrastructure and building
materials that benefit from the fiscal stimulus programmes of
the various countries.
Disclaimer : Information herein has been obtained from
and is based upon sources Pheim Unit Trusts believe to
be reliable, we do not guarantee its accuracy and it
may be incomplete or condensed. All opinions and
estimates constitute Pheim Unit Trusts’ judgment as of
the date of the report and are subject to change
without notice. This report is for informational
purposes only and is not intended as an offer or
solicitation for the purchase or sale of units.
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