Signs that Asian markets may be bottoming

Written by Assif Shameen

Friday, 06 March 2009 14:53

AFTER A BIG rout in US markets overnight when benchmark indices like the Dow Jones Industrial and S&P 500 plunged to new 12-year lows, Asian markets are all opening up substantially lower on the last day of what has been a fairly horrific week for investors worldwide.

Warning of General Motors’ impending bankruptcy, a deteriorating banking crisis in US and Europe and new employment data in US due out tonight which might show unemployment soaring past the 8% mark are putting pressure on markets globally. Clearly, investors aren’t convinced just yet that the real economies are about to turn the corner anytime soon.

But a new report from Bank of America Merrill Lynch says that while things may be bad in Europe and North America, Asia has reasons for hope. The report titled 7 Signs Asia is Stabilizing cites reasons why extreme pessimism in the region will soon be passé.

Merrill believes China’s improving Purchasing Managers' Index or PMI for the third consecutive month is the first big plus. “Chinese output and new orders are now expanding after seven months of contraction, driven by domestic demand,” the report said.

New Korean data has also been fairly positive. Korean inventory-shipments ratio has improved for two consecutive months. Traditionally, the inventory-shipment ratio has excellent relationship with Asia equity prices. Moreover, Merrill says Korean export growth improvement is telling. Korea’s exports to China were up 3% y-o-y and Korean exports to US were down only 3% y-o-y in first 20 days of February.

Japan is showing better signs too. Unprecedented recent production cuts means Japan is no longer building up huge “unwanted” inventory. Indeed, some large Japanese companies like Toyota are now planning to increase production in May.

That’s not all. The PMIs or Purchasing Managers’ Indices in Hong Kong and Singapore are showing improvements as well. That bodes well for Asian markets and might even help put a floor. Early cyclicals are outperforming within Asian equity markets. Asian tech stocks have in recent days held up very well despite the plunge in financials and Asian consumer discretionary stocks have way outperformed industrials.

One other evidence of the shift toward economy-sensitive stocks in Asia in recent days: The only Japanese equity sector recording year-to-date gains is autos (surprise, surprise) while in Korea, it is technology and autos.

Still, Asian investors should look for more clearer signs of recovery, says the US investment bank. Better Asian data on trade will be one such signal for investors to take the plunge. Chinese domestic demand and G7 consumer data as well as Taiwan and China’s February export data is due next week. Most economist are looking for fairly horrific figures but if the data surprises on the upside it will sure sign of stability.

The Edge Singapore