Asian Madness

What a worrisome start for the week yesterday. After celebrating the nation's 51st anniversery of independence, the KLCI greeted the new month of September with news of Bangkok's emergency rule, a vulnerable Korean Won, Ringgit, Indonesian Ruppiah and Thai Baht, the resignation of Japanese PM and the fear of knee jerk sell down on the prospects of PKR taking over the government on September 16. As we are aware, Asian markets have been wacked the hardest since the beginning of the US originated subprime crisis last September while the originating markets appears almost "unscathed" compared with the Asians. Below is a quick recap of the Asian economies and markets to date and what footing they are in now as compared to the 1997 financial crisis and whether it is a good time to start accumulating. I am of the opinion to just let the markets (and politics) play themselves out in this bearish cycle first....opportunities abound latter.

FT.com: Forget the subtleties of the decoupling debate – Asia seems to be reverting to type before investors’ eyes. This week alone has seen riots, threats of intervention to support vulnerable currencies, cuts to growth forecasts and gyrating equity markets. Such madness was thought to be consigned to the tail end of the last decade. Even a year ago, as the western world slipped into the first subprime cracks, Asia was supported by the view that the region could now look after itself.

Yet Asian equities are the worst performing stocks on the planet year-to-date. Most markets have fallen by between a quarter and a fifth. For more open economies, weakening exports are to blame. Singapore’s non-oil exports fell year-on-year for the third consecutive month in July. Next year, Hong Kong’s economic growth could well be half the 6.7 per cent of 2007. In countries such as Thailand and Malaysia, too-low real interest rates are fuelling inflation, which in turn is hurting consumption. Korea is suffering from both problems, as well as by excessive private sector indebtedness.

As worrying as all that appears, the region is in far better shape than it was during the turmoil of the late 1990s. (Only Vietnam, with inflation near 30 per cent, is moving worryingly close to basket-case territory.) Foreign exchange reserves are higher and overseas debts are lower. Consensus earnings growth expectations for Asia ex-Japan are still about 7 per cent for next year. What is more, falling commodity prices, particularly oil, may well boost exports and help Asian central banks keep a lid on inflation without crimping domestic demand.

Does that make equities a buy at these depressed levels? Certainly, if the good old days of Asian investing have returned, any improvement in global sentiment will be magnified across Asian markets. Trouble is, at about 15 times consensus earnings for this year, Asian equities ex-Japan are not screamingly cheap and expectations for double-digit profit growth look a tad optimistic. Welcome back the rollercoaster ride of high-risk, high-return Asia.

* Fin Facts: OECD upgrades 2008 US economic growth forecasts, downgrades Japan and the Eurozone, forecasts recession in the UK.

* Bloomberg: The Reserve Bank of Australia cuts Australia's interest rate by a quarter point to 7% yesterday and signalled it expects growth to slow further.

* BT: Besides Korea Development Bank, HSBC and a Chinese Bank are also interested in Lehman Brothers.

* The WSJ: The top four Chinese banks(CCB, ICBC, BOC and Bank of Communications) have cut their Fannie and Freddie debts investment. BOC for instance has reduced its exposure of USD23.3b as at Dec 31 2007 to USD12.7b at the end of June 2008.

* The WSJ: Tata, the maker of the world's cheapest car, warned it is suspending construction of its Nano plant and reviewing possible plans to move manufacturing from eastern India in the face of violent protest from farmers and local politicians there.