Another Kind of Asian Contagion

Another Kind of Asian Contagion
Tag it:Philip Bowring
17 August 2007
The Asian region pays for the excesses of the west






How come all of Asia?s markets, with the bizarre exception of China, have fallen
so much farther and faster than the US markets where the credit rot began?




It?s a situation which flies in the face of the assumption that strong external
positions, high but not extravagant valuations and mostly low domestic and
foreign debt would provide a shield. Even if local growth slowed sharply, there
should be no reason for the kind of near panic evident in the US, where
exorbitant foreign and household debt and opaque asset-backed investment
instruments have been all the rage. Cash-rich Asia should have been protected,
but it wasn?t.




Here are the key reasons.




Asian markets have been driven down primarily by foreign selling. For example,
net foreign sales in Taiwan totaled NT$61 billion on August 15 and 16, bringing
total net foreign sales in that market to NT$156 billion since the beginning of
the month. Those sales followed an almost equally strong surge into Taiwan ? net
foreign purchases in June were NT$185 billion. July showed a near buy/sell
balance but that was because foreigners were buyers in the first half of the
month, then became sellers. Much the same pattern can be seen for Korea and
Thailand. Korea had hit a record high and Taiwan a multi-year high in late July
so it is hardly surprising that when the momentum went into reverse that would
plummet ? both are down around 16 percent in that time.




The issue is how far fundamentals have been changed by events, or whether local
liquidity can gradually fill the space left by the foreigners. All this selling
has had to be absorbed by local investors who themselves have been thrown off
balance by events. Interestingly in Taiwan and Thailand the big net buyers have
not been local institutions, which have mostly remained on the sidelines, but
individual local investors who are probably buying back many of the same stocks
they had sold earlier to the foreigners at a higher price.




In both there may be scope for local institutions as well as individuals to buy.
Korea?s national pension fund is committed to increasing its equity holdings and
government-controlled Taiwan funds are likely to be in action before the
elections at year-end. However these may not be enough should foreigners
continue to exit ? which many can still do at a handsome profit.




Selling by foreigners has been particularly aggressive partly because some of
the Asian equity markets are relatively liquid at a time when western credit
markets have dried up, leaving hedge and other funds facing redemptions
desperate to find liquidity wherever they can.




A second reason for foreign selling has been the ?one size fits all? attitude
many take toward so-called emerging markets. Those who bracket Korea with the
Philippines and Argentina are destined to find themselves facing redemptions on
the assumption that in times of market distress, emerging markets will suffer
more than developed ones. Of course previously some developing country markets,
such as the Philippines and Indonesia, were driven to unsupportable levels by
foreign buying and have since suffered the reverse. But what applies to them
does not apply to economies such as Taiwan, Korea and Hong Kong, which are more
developed than much of Europe.




A third reason for the Asian plunge has been the worry that local companies,
banks in particular, may have been badly caught in the ABS (Asset Backed
Securities) and CDO (Collateralized Debt Obligations) chaos. One Singapore bank
has owned up to some losses but there are probably lots more where those came
from, particularly by banks and insurance companies in Japan, Taiwan, and Korea
which had been looking for places to put their cash hoards to work for high
interest than available on plain vanilla deposits or T-bills.




European banks have suffered billions of dollars in losses because they were
lulled by greed and ignorance into buying Wall Street?s deception B grade
paper which through Moody?s approved financial alchemy was converted into Triple
A rated assets. Big banks in Taiwan and Korea, which have not been entirely free
of suspicions that they may be carrying more non-performing loans than they like
to admit, have tumbled more than the indices.




The fourth problem applies only to Japan ? the dramatic rise in its currency.
The yen is 9 percent against the US dollar since early August and 6 percent
between August 15 and 17. Against the New Zealand dollar it has gained 22
percent and not much less against the Australian. Both currencies had been
favorites of the carry trade so expect more gigantic losses and bankruptcies
from carry traders.




Whatever else happens in the world, a sharp rise in the yen will cut sharply
into the profits of Japanese exporters, the main sufferers from the rout of the
Topix. Korea and Thailand may have quietly welcomed the foreign money exodus,
which reversed earlier sharp currency rises which were denting export profits.




Finally we come to the issue that will be the most important of all: what will
be the impact of this global event on US import demand? For the medium to longer
term the dangers to east Asia have probably been underestimated ? though in the
shorter term the above issues are probably far more important.




The fact is that the US trade deficit is unsustainable and the reckoning is
probably nigh as the collapse of household credit finally brings about a
recession in US consumption and hence a probable drop not just slower growth
in Asian exports. Even though Japan and Europe have strong external positions,
their growth is likely to slow under the impact both of the US and global credit
concerns.




As for China it is remarkable mostly because its markets behave as though
nothing has happened, despite mounting evidence of sharply rising inflation,
various property bubbles and the prospect that a sharp slowdown in (excessive)
investment will coincide with the US recession, even if the US does not take
specific measures against China over its currency policy or as a scapegoat for
other US problems.




So far Taiwan has suffered particularly from assumptions about US and China
slowdowns. This is probably mistaken. Most of Taiwan?s exports to China are for
assembly and then export to global markets, of which the US is important but not
overwhelmingly so. As with Korea, those in the forefront of their industries
should not suffer too much. More problematic could be commodity suppliers who
could find new supplies arriving just as China?s excesses come to an end.




If energy prices join the decline, expect to see that contribute to a further
slowdown in the rate of growth in global money supply, which has been fuelled by
the dollar surpluses of energy exporters. Expect commodity issues to translate
into a sharp fall in the Aussie dollar, which may well come on top of a credit
crisis in the Australian housing market. Malaysia?s trade surplus will likely
wither and Indonesia could face difficult times if there is a broadly-based
commodity decline.




However, most of that is for the medium term. For now it is quite possible that
the levels of bank and corporate liquidity in most of Asia will spur a
significant pickup in local markets once foreigners desperate for liquidity are
gone.




Most of Asia may be too dependent on the US and China markets for its own good.
But most countries here are in a better position to stimulate domestic demand
than older ones in the Eurozone and Japan. Meanwhile valuations are now mostly
below those of the mature economies, which may be less volatile but also have
very weak growth prospects and large external deficits and over-extended
mortgage credit.




In sum it may be desirable to stay out of Asian markets for the time being, but
most of the currencies look to be relatively safe places to hide.

Comments (0)


as
.