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How is volatility impacting the Asian market ?

Asian markets have not been immune to recent bouts of market volatility and weakness.

As we are all aware, in times of uncertainty, risky assets are sold down and Asian markets, despite the strong fundamental economic support, are still viewed as a risky play within the equity basket. In the following article, we reflect on how recent macro events are likely to impact investors in Asia.

It’s all Greek to me

Problems surrounding Greek sovereign debt and possible contagion across Europe may, on the surface, have little to do with the dynamics driving Asian consumption and growth. However, it is clear that a weaker euro makes Asian products less competitive. In addition, it will be more difficult for Asian companies – with already tight margins – to sell into the eurozone as a result. Finally, the loss of buying power by consumers and companies in the eurozone will have a negative impact on their consumption power.

What has been hurting ?
Exporters and companies with large revenue streams in Europe are among those that have been worst hit. Going forward, Europe’s woes are likely to prove damaging to economic growth in Asia. Take China, for example. Of the country’s economic growth, 25% is based on exports (with 20% of this being Europe based). Were this demand to fall by 20%, due to European weakness, this could shave up to 0.5% off Chinese GDP growth.

The bigger impact, of course, is on sentiment, and relates to the earlier comment regarding how risky assets are sold down on the back of uncertainty. For companies at this level, we are seeing some opportunities but these companies’ future performance hinges on the outcome of the euro.

Another ancient civilization, an opposite set of issues

The Chinese government launched new policies to tighten the domestic property market in a bid to control the asset bubble. The policy was targeted at limiting speculative demand in the housing market and included an increase of the percentage of down payment and the mortgage rate for investment and speculative purchases.

What has been hurting ?
Tier 1 property developers should be well positioned as they raised capital in the early stage of the cycle. Property prices in tier 1 cities, along with transaction volumes, have dropped sharply but the hardest hit sectors have been the marginal or tier 3 players. Again, the bigger impact is on sentiment. This remains negative given continued uncertainty regarding future interest rate and other tightening measures.

While we have been warning of the policy headwinds in China, especially on the property sector, the magnitude of the latest policy actions is more serious than we anticipated. As such, we expect that the market will take some time to digest the policies, and sentiment may remain fragile.
That said, we continue to hold the view that proactive tightening measures are actually positive for China’s medium-term economic development as the authorities work to rein in inflation expectations and excessive liquidity conditions to prevent the chances of a hard landing in the economy further out.
In the short term, this policy should drive down the transaction volume and, as a result, slow the fixed asset investment growth. We still believe though that China will deliver 9% GDP from 2010, on the back of better consumption growth. Further, corporate earnings should continue to recover at around 20%, given the low base of 2009.
Areas of the market that may offer opportunities for investors are likely to include domestic names, notably consumer plays, which offer stable and visible earnings growth, as well as exposure to China’s secular growth trends. Shifting the focus from investment to domestic consumption is not only the long-term development trend, but will top the policy agenda in 2010.

Street parties

Two countries, two different parties! To the south, the situation in Thailand has calmed down. However, there is still risk here as the country remains divided. Also, expect more volatility in the future given the uncertain succession planning for the monarch. Recent disruption in the north involves another two parties. While an altogether different disturbance, the loud speakers there are also turned on, though they are blaring propaganda across the DMZ as Mr. Kim rattles his sabre.

What has been hurting ?
As noted, for Thailand, the event has mostly passed, but the market will still be on edge for some time. For South Korea, the situation there evolved into more of a currency story with a weakening won. This has resulted in exporters outperforming domestic names. On the flip side, not surprisingly, construction firms related to housing and other consumer names have been hit, given weaker local sentiment and confidence.
For the Koreas, we believe that war is an unlikely outcome, mainly because China won’t be supportive. Similar to all situations like this, there is always a fair amount of unpredictability. We do not believe it is in Kim Jong II’s interest to start a war but the recent action should, however, help secure his grip on power. Knowing this, we do not think he will act too irrationally. Tension may, however, last for some time and throw out some interesting buying opportunities but we are not rushing in at the moment.

David MacKenzie, Product Manager, Asia ex-Japan Equities

Important Information :
The views and opinions contained herein are those of David MacKenzie, Product Manager, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisors only. This document is not suitable for retail clients.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.


Jeudi 10 Juin 2010

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