Hong Kong, 21 September Chinese and South Korean shares are expected to lead key Asia-Pacific equity markets this year with huge gains, but Japanese stocks will sputter as the region’s top economy sees slower growth, a Reuters poll shows.
Overall, Asia could emerge as the world’s safe haven, anchored by China’s double-digit growth and rising domestic consumption, which could help ease the impact of a possible slowdown in the United States, Asia’s largest export market.
Most Asian markets have been volatile in recent weeks as the global credit squeeze and fears of a US recession made investors nervous.
But analysts say global equities now appear to be on firmer footing after the US central bank slashed interest rates on Tuesday (18 September), and Asia’s growth story remains largely intact even if export plays are a riskier bet.
MSCI’s measure of Asia Pacific stocks excluding Japan has risen about 21% so far this year, outpacing a 7% gain in global equities.
“The interest rate cut would definitely help sentiment, because the market has put a lot of expectations in it,” said Daiwa Asset Management’s Mona Chung, who helps manage its $2.5 billion Asia Pac fund in Hong Kong.
Though US economic risks could impact the region’s export sectors, local consumption in the area is “resilient, especially for China,” Chung said, a view echoed by her peers.
Asia “is by far the best-performing region to date for very good reasons,” said Anthony Muh, an Asia Pacific-focused fund manager who oversees $1 billion in assets at AT Asset Management (Hong Kong), a unit of UK-based Alliance Trust .
“The economic foundation of most Asian economies is far more robust than had been the case previously. The robustness of domestic consumption in major economies of Asia, i.e. China and India, are providing an offset to a U.S. slowdown.”
Japan’s Nikkei has lost about 5% so far this year, making it the worst performer in Asia and the only major regional market in the red.
But analysts say corporate earnings growth, which some have pegged as high as 10%, may push the world’s second-largest stock market into positive territory by year end, if Japan can ride out the global credit squeeze without much damage.
Muh, who is overweight Greater China and underweight Australia and Japan, said the shock resignation of Japanese Prime Minister Shinzo Abe last week and ensuring leadership battle could heighten political uncertainty and mute market performance.
China’s sizzling mainland-listed equities should finish 2007 among the world’s top performing markets, having more than doubled so far this year with a gain of 170%, according to a Reuters’ poll of 33 strategists and brokers.
Lofty valuations for its shares, which are trading at about 40 times this year’s earnings, have some investors on edge, but many analysts see no risk of a major near-term pullback because of massive amounts of liquidity in China.
Korea, Hong Kong on top
The China effect has fired up Hong Kong, where a third of its listed companies are based in mainland China, accounting for half the market’s total market value and 60 % of trading volume.
Hong Kong is the gateway to China for many global investors because foreign investment in the mainland is still highly restricted. H shares, or Hong Kong-listed shares in mainland companies, were expected to return around 40 percent this year, tying with South Korea, but H share gains so far have already exceeded many forecasts.
Hong Kong’s blue chip Hang Seng Index -- which has recently included more mainland Chinese companies to its roster of property developers, banks and other “old Hong Kong economy” companies -- is expected to return 24%.
Singapore’s main index is expected to post a 21% gain this year, but analysts say the rally may be losing steam as investors grow increasingly cautious about valuations.
“Singapore has a strong economy but most of this has been reflected now,” said Macquarie Securities strategist Tim Rocks.
“We see growth coming from some of the northern economies like Korea, so we may see some funds going out of Singapore into those economies.”
Australia is expected to end the year 16% higher on robust corporate earnings growth, strong commodities markets and the prospect of more mergers and acquisitions.
The China machine versus a US slowdown
As financial markets grapple with a possible slowdown in the world’s largest economy, Asian markets from Australia to Japan are taking shelter in China’s rapid industrialisation.
In Japan and Korea, stocks linked to the “China effect” like steel and shipping are powering the market. Resource-rich Australia has benefited from China’s insatiable need for metals.
Hong Kong also rallied to records in the days after Beijing announced an offshore investment programme that stoked hopes of a flood of money from China crashing across the border.
With mainland stock markets largely isolated from global financial shocks thanks to China’s capital controls, some analysts say Hong Kong’s correlation with that otherworldly market is a good thing.
“The liquidity story combined with a very strong earnings growth story ... is powerful. You’re linking the Hong Kong stock exchange with the ultimate bubble machine,” said JPMorgan Asia Pacific equity strategist Adrian Mowat.
But global liquidity risks still loom, given the credit squeeze and uncertainty over how much more the US subprime mortgage lending debacle could play out.
Under this scenario, emerging markets like South Korea and Hong Kong are at risk, given investors will cash in their most profitable positions first in the event of a meltdown.
Concurrently, the risks of a US slowdown are keeping analysts cautious on export-reliant economies.
“Korea we are bullish on, but it may start to stumble a bit as the global economy slows at the end of this year,” said Sean Darby, Asia Pacific strategist at Nomura Securities.
While calls are unanimous for investors to steer clear of export plays if economic growth recedes, the financial sector is also getting a thumbs-down.
“We still think financials will have a difficult time over the next 6 months. We don’t think all the skeletons are out of the closet at the moment,” Darby said.