Asian fortunes to fluctuate with unstable global trends
Asian fortunes to fluctuate with unstable global trends
SINGAPORE (AFP): Despite sound economic fundamentals, the region's financial markets will stay weak in the short term with volatile flows of investment reflecting uncertainty in the global economy, analysts said.
Asian economies have rebounded, but investors appeared to move in and out of their markets with greater frequency as they mulled the U.S. Federal Reserve's ability to slow down the robust US economy, they said.
Regional stockmarkets have taken a hit in the past few days and Asian currencies have depreciated as world markets expect a half a point rise to 6.5 percent in the key US federal funds rate on overnight loans when the Federal Open Market Committee meets on Tuesday.
But the new level of interest rates is not the issue.
"People are concerned with how many more interest rates rises it's going take to have a soft landing in the US economy," said Anand Aithal, vice-president for Asia investment research at Goldman Sachs Singapore.
"Our markets will be weak reflecting the fears of the global economy despite the fundamentals in Asia, and the fundamentals in Asia are fine," he told AFP.
Vickers Ballas Investment Research noted that stock markets remained increasingly volatile and vulnerable to the inflow and outflow of foreign funds.
Thailand and Singapore saw runs early last year, which were followed by rises in Hong Kong and Malaysia, while other stock markets slowed.
"The reality is that the hot money that swirls around Asian markets these days is no different than in past cycles, with foreign portfolio funds capable of exiting just as quickly as they entered," it said in its quarterly strategy report.
But the public's obsession with dotcom listings and the preference for "glamor" stocks "suggests that markets are falling prey to a 'herd instinct' that will only serve to increase volatility going forward," Vickers Ballas added.
Aithal considered Singapore and Australia the "safe havens" for investors but felt that these, along with the rest of Asia, "will rise and fall together."
Following a slew of US economic data showing stronger wages and productivity and record low unemployment levels, markets are now eying US inflation figures for April, to be released before the FOMC meeting as an indicator of the Federal Reserve's next move, analysts said.
"We need more data. As soon as the data shows a soft landing for the US, then Asia will recover dramatically," Aithal said.
Analysts believe that interest rates across Asia will rise only moderately in response to the US Federal Reserve's tightening measures.
"A 50 basis point rate hike in the US is very well priced into US bond and stock markets, as such, the impact on US markets will not be dramatic, thus impact on Asian markets will not be significant," said Chua Soon Hock, strategist at Singapore-based Asia Genesis Asset Management.
But the more bearish analysts expect the FOMC to increase the key federal funds rate in succeeding phases by as much as 125 to 300 basis points, until the rate stands at 8.0 percent. This could lead to a risk of a recession, they said.
Asian economies are in better shape to cope with any eventual US downturn, analysts said, but they warned for now of the risks posed by the weaker regional currencies.
Standard Chartered Bank, in its latest weekly analysis of capital markets, reiterated that a moderate rise in domestic interest rates across the Asian economies will occur in 2000.
"This view remains valid for the moment, and is still based on the region's nascent economic recovery, substantial excess capacity, subdued inflation," the bank said.
It also believed Asian authorities will continue with monetary policies to facilitate the restructuring and the development of its domestic bond markets.
But "with commodity prices firming, crude oil prices have climbed above US$26 per barrel again, there are significant upside risks for imported inflation," Standard Chartered said.
The weaker currencies have also highlighted concerns that Thailand and Indonesia may follow in Malaysia's footsteps by introducing capital controls as a means of curbing volatility in their markets, it added.