Source: www.asiaecon.org |

The Asian stock markets: Boom or Bust?

Year 2006 was the period in which the Asian stock markets saw unprecedented gains of the kind rarely been witnessed before. The stock markets of China, Hong Kong, Singapore, India, Indonesia, Malaysia, New Zealand and Vietnam hit record highs while the laggards like Japan, South Korea and Taiwan also posted…

Year 2006 was the period in which the Asian stock markets saw unprecedented gains of the kind rarely been witnessed before. The stock markets of China, Hong Kong, Singapore, India, Indonesia, Malaysia, New Zealand and Vietnam hit record highs while the laggards like Japan, South Korea and Taiwan also posted muted though respectable gains. With this state of affairs, it was perhaps unsurprising that there was a huge scramble by global investors to flock to the Asian markets just hoping to reap some of the big rewards for themselves. However, some people feel that the amazing growth of these stock markets needs to be tempered with a healthy dose of caution since the nightmarish memories of the 1997-meltdown of the region’s equity markets just refuse to die out. This has raised a few doubts among analysts studying the region very carefully and has prompted many to be sceptical about the potential growth prospects of these markets in the future.

A year of skyrocketing growth

During the last few years, many stock markets in Asia have been rising rapidly. In China, during 2006 stocks in the home market sizzled, at long last reflecting the country’s gathering economic might after years of paltry returns. The MSCI China A, an index of domestically listed stocks, soared 128%.1 The scenario was also quite rosy in India when the Bombay stock exchange rocketed another 46.7% in 2006.2 Elsewhere in the region, markets bolted ahead on sound economic fundamentals, with markets in Indonesia, the Philippines and Singapore returning 55.3%, 42.3% and 27.2%, respectively.3 Even the so-called stragglers, Taiwan and Malaysia, clocked returns of 19.5% and 21.8% in 2006, a reflection of just how turbo-charged the growth trend has been. The only disappointments were South Korea which rose by a modest 4% last year and Japan, which contrary to expectations managed to end the year up by only 6.9%. This is creditable given that these enormous returns occurred despite a plunge in the region’s stock markets during May and June, when foreign investors were spooked by the prospect of rising interest rates and fled riskier assets.4 With massive investor confidence and huge amount of global liquidity prevalent in the region, it is no wonder that there has been a mad rush by global investors to invest in the region.

Factors driving the growth

Many changes have transformed the domestic economies of the Asian region radically over the last decade. Many market watchers believe that these emerging economies are on a much surer financial footing than in the past. Many have pared their deficits, increased their reserves and reduced their dependence on exports to the U.S., thereby decreasing their vulnerability to a potential economic slowdown there.5 Some investors believe that these countries are finally beginning to decouple from the US economy either by trading more among themselves or relying more on local consumer demand.6 However, the skeptics discount this hypothesis and consider it too early to draw conclusions. A slow US economy could still trigger a region-wide recession in the near future.

Impediments to sustainable growth

Despite all the hype and the hoopla surrounding the Asian economies and their booming stock markets, the future growth outlook for these economies is strangely benign. Experts believe that even though Asia is presently more resilient to a US slowdown than in the past, a drastic slowdown to the US economy might seriously upset the status quo. Nowadays, investor sentiment remains strong given several positive factors like the lower international oil prices and a recovery staged by Wall Street after the mid-year slump in 2006. However, financial markets might feel the impact if institutional investors in the US and Europe become more risk-averse, or if the global liquidity that has been funding portfolio investment in Asian markets dry up.7 The region is still highly export-dependent and greatly vulnerable to developments in the US. In fact, many of the goods traded within Asia are still used as inputs for products that are ultimately sold to the US and other OECD economies.8 These emerging economies are currently charaterized by weak inflation levels, strong growth, solvent governments and a lesser degree of dependence on foreign money to finance their investment requirements.9 Although the domestic economies in Asia seem to be in impressive shape, they remain vulnerable to disruption if investment-positive factors begin to wane.  Potential investors should exercise a significant degree of caution and restrain while deciding whether or not to invest their money in Asia’s growing bourses.

Source: www.asiaecon.org |