The stock market scorecard for the first quarter of 2008 looks very different from what analysts had expected at the start of the year.
The four best performing Asian markets have been Taiwan, Pakistan, Thailand and Sri Lanka, posting modest gains of between 2% and 8% in US dollar terms.
Is this the Asian “decoupling” that global investors had so fondly hoped for? Weren’t the larger and faster growing economies of China and India supposed to shield investors from the mortgage- and credit-related financial crisis in the US?
And look where the Chinese and Indian markets are at the start of the last day’s trading for the first quarter: among the 10 worst performing equity benchmarks globally so far this year, together with Vietnam, that other Asian miracle-in-the-making.
With declines of about 16% year-to-date in the Hang Seng Index and the Kospi Index, Hong Kong and South Korea are also near the bottom of the Asian heap.
Several things went wrong with the larger, more liquid and more-foreign-owned markets of the region.
First, hedge funds sold stocks that were the easiest to sell as their investors, spooked by volatility and gripped by pessimism, pulled money out. As Mark Matthews, a Merrill Lynch and Co. equity strategist in Hong Kong, says: “It is easy to kick out Asia and come back to it later.”
Winners and losers
Besides, with energy, food and metal prices holding high in an environment of declining real US interest rates, Asian markets paid a price for rising inflationary expectations, which have forced them to tighten monetary conditions.
Or at least not loosen them. That has been particularly a problem for economies such as China, India, Vietnam and Singapore, where domestic demand—either for investments or for consumption—is strong.
Local forces, too, have played a part. In China, large blocks of currently non-tradeable shares held by the government and strategic investors are coming out of lock-up restrictions. Investors are nervous about a stock glut, which could be as large as $428 billion (Rs17.12 trillion).
So much for the losers.
The winners’ story is much more remarkable, especially when you consider that the quarter began with a heightening of political risk in two out of these four markets and—at least at the time—a far-from-certain process of reduction of the same risk in the two remaining ones.
Assassination, civil war
Sri Lanka and Pakistan haven’t decoupled from the global meltdown. If these illiquid markets have done well, it’s only because they have paid investors a hefty premium for taking on the risk of domestic politics or internal security conditions taking a turn for the worse.
The final week of 2007 saw the assassination of former prime minister Benazir Bhutto in Pakistan and the escalation of hostilities between the army and the Liberation Tigers of Tamil Eelam in Sri Lanka. That led to the Sri Lankan government withdrawing from a 2002 ceasefire agreement in January.
The politics in both these countries remain precarious.
A showdown between Pakistan’s newly elected democratic politicians and their sworn enemy, President Pervez Musharraf, could produce outcomes that are impossible to predict right now. Musharraf, it must be remembered, no longer controls the army, the most important source of political power in Pakistan.
Nor is there much hope of a quick reconciliation between the Sinhalese and the Tamil population in Sri Lanka.
On the mend
The politics in Taiwan, stable now, were also rather volatile three months ago. Until the final week of December, Ma Ying-jeou, who recently won the election for Taiwan’s presidency, still ran a risk of being disqualified from contesting the poll. The high court cleared him of corruption charges only on 28 December.
The new president of Taiwan is expected to end the previous administration’s frosty stance towards China, allowing the Taiwanese economy to benefit from the growth and dynamism of the mainland. All of that, of course, is still up in the air. And so is the political future of Thailand.
In late December, Samak Sundaravej, who had just won a landslide mandate to form a democratic government and end the disastrous 17-month rule by a military junta, was still trying to cobble together a coalition amid concerns of stability.
Many observers feared that the Thai army, loath to lose power to a loyalist of former prime minister Thaksin Shinawatra, would scupper Samak’s chances of forming a stable government.
Those concerns, it appears, weren’t unfounded. At the moment of writing, Thailand is once again looking shaky. There’s speculation about a coup plot that Prime Minister Samak says will fail.
Betting against internal or external strife, sometimes simply on the assumption of “it can’t get any worse”, is risky. But it may be better than swooning over sexy—but fundamentally untrue—hypotheses like decoupling.
Or at least that’s what the Asian equity scorecard suggests.