Quarter 1, Asia ex Japan Market Commentary

Author: Christopher Vale, Managing Director & CIO, Asia.

The first quarter of 2008 was one of the worst quarters on record with the MSCI Asia ex Japan Index falling 14.4%. Worries of a US recession, rising credit spreads, an unwinding of the yen carry trade and a fire sale of Bear Stearns pummelled the world’s financial markets. The Fed cut the discount rate by 200bps to 2.25% in 1Q 2008, the CRB index rose to an all time high before coming off in late March while the oil price breached USD100 per barrel. 

India was the worst market falling 27.0% although China wasn’t far behind falling 23.7%. Since these were the most expensive markets and had performed very well previously this was, perhaps, not surprising. However in India the market was also disappointed by the increase in short term capital gains tax from 10% to 15% and the indirect hike of securities transaction tax announced by the government in the budget. More recently there have been further inflationary concerns. In China the snowstorms and the Lunar New year holidays pushed February's CPI to a record 12 year high of 8.7% yoy. In a bid to curb rising inflation the government raised reserve requirements by 100 bps to 15.5% and froze regulated prices of energy and other utilities.  

The two elections in Malaysia and Taiwan yielded fairly major surprises. In Malaysia the Barisan National managed to hold onto power but failed to command a two thirds majority and the market fell sharply. In Taiwan the KMT's pro China Ma Ying-Jeou was elected President with 7.6m votes, 2.2m ahead of the DPP's Frank Hsieh, a much larger size of victory than expected and the market reacted positively. Taiwan was the best performing market in the region during the quarter, up 5.3%.  Thailand also had a better quarter rising 3.3% after the Government approved a tax stimulus package.  Furthermore, tax cuts on property are also expected and earnings growth has been good.  

Clearly the US and financial economic news has continued to deteriorate; however markets will recover long before a recession ends. For Asian investors therefore there are two issues; how much will Asian economies be affected by slowdowns in the US (and Europe/Japan) and when will US markets start recovering. The point here is that it seems that even if Asian economies have or will partly de-couple, it is much less clear when or if at all Asian stock markets will de-couple from the US. This we feel is primarily because many global investors are reducing risk and see Asian markets as riskier (clearly they are, as measured by volatility). However, there are also more and more investors who see Asian country and corporate balance sheets as being stronger than many western markets and certainly see Asian currencies as likely to offer upside. Our view is that the US recession will not be that deep but that it may take a while for growth to pick up while conversely Asian economies in many cases needed to slowdown. The balance between slowing growth and rising inflation is difficult with talk of stagflation in the west but we think markets are probably through the worst of this period but will remain volatile for a while yet.

CAUTION: The opinions expressed in this commentary are the views of Rexiter Capital Management Ltd (Rexiter). This commentary is intended for institutional investors only and is not suitable for retail clients.