Stable hort-term outlook for markets

Stable hort-term outlook for markets

SINGAPORE (AFP): Asia's economic crisis enters its 16th month on Monday with analysts expecting regional financial market stability at least until the New Year. But the long-term picture remains uncertain.

Share prices and currencies in the region have recovered substantially in recent weeks on the back of a stronger yen and lower interest rates while speculators have retreated to the sidelines for a much-needed breather.

"I'm bullish on Asia short term, with virtual cycles of falling interest rates, rising equity markets and forex (foreign exchange) to continue till the end of year," said Vincent Low, fixed income strategist at Merrill Lynch.

Low noted that short-term rates -- powerful drivers of equity markets -- in Thailand, Singapore and Hong Kong had fallen below pre-crisis levels and the extra liquidity which this would create was positive for markets.

But he was cautious about the long-term picture for the region.

"This is primarily because the very strength that is causing the (market) rally in the last few months will turn negative for Asia in 1999 if the (October) U.S. interest rate cuts were symptomatic of financial sector fragility," Low said.

Trouble would brew also if the yen strength had been caused by hedge funds unwinding short-term positions to cover emerging markets losses elsewhere, he said.

Asia's economic crisis was triggered on July 2, 1997 with the de facto devaluation of the Thai baht. That led to a stock and currency meltdown together with a collapse of real estate prices and a banking crisis.

After plumbing lows at the end of August this year, Asian equities and currencies have risen by about 30 to 40 percent during what one analyst called the current bullish interlude.

ANZ Investment Bank head of Asian markets research Daniel Lian forecast the present rally would persist into January with "at least another 20 to 25 percent upside" in most Asian equities and "some five to 10 percent upside" in most Asian currencies.

"As long as Brazil and Latin American markets do not collapse in a major fashion like Russia, flows of international capital into Asia should intensify in coming months," Lian said.

Singapore and Hong Kong stocks last week scaled levels unseen for five to six months while Thailand's stock exchange faced its busiest period in eight months.

The Thai baht is riding on a 12-month high against the U.S. dollar, the Philippine peso and Indonesian rupiah are at nine- month highs, the Taiwan dollar at an eight-month high, the Singapore dollar at a six-month high and the South Korean won at a three-month high.

Thio Chin Loo, currency strategist at Banque Paribas, said amid the bullish market scenario for the short term, "I don't expect speculative activity to pick up again which means domestic players will continue to drive Asian currencies higher.

"They may overshoot a bit in the last wave of unwinding before further weakness sets in," she cautioned.

She said the U.S. dollar could remain depressed by mid-term congressional elections on Tuesday which could refocus attention to possible impeachment proceedings against President Bill Clinton over his affair with White House intern Monica Lewinsky.

Fong Cheng Hong, regional analyst at Nomura investment house, said foreign exchange stability would be the key to bringing back investors to Asia as well redressing the debt burden in the region.

"I think currency stability is already showing and the signals are already out to investors, who know they cannot write off Asia," she said.

But Fong cautioned that stock markets could face turbulent times again because they were tied to company earnings, which could take a hit as many Asian economies remained mired in recession.

The prospect of political and social unrest in some of the economies could further dampen sentiment.

Amid the respite in financial markets, Christopher Wood of Santander Investment Securities warned that the Asian crisis had not yet climaxed in China, Hong Kong or Japan.

"In all three we have not received the point of maximum liquidation," he said. "Southeast Asia is a different matter. But this region will not shape perception towards Asia globally."