Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,117.51 -8.63 -0.28%
Hang Seng 26,719.58 -128.91 -0.48%
Dow Jones 27,025.88 +23.90 +0.09%
Shanghai Composite 2,938.14 -39.19 -1.32%
Asian Indices Need To Climb Fast Before US Stock Market Runs Out Of Steam
Perspective | 22 March 2013
By: Gabriel Gan
Articles (41) Profile

Asian stock markets, with the exception of Japan, have underperformed their US counterparts by a long mile. Even European markets have fared better than some major Asian markets even though economic growth continues to be an elusive dream for the European countries especially after what happened in Cyprus.

While the Dow Jones Industrial Average (DJIA) continues to forge ahead, creating new historical highs, Asian markets in China, Hong Kong and Singapore lagged behind. With the hype about the DJIA’s record-breaking feat, investors failed to realise that the S&P 500 is still a whisker away from the all-time high created in October 2007.

From the start of February to 21 March 2013, the Shanghai Composite Index (SSE) lost 102 points, or 4.2 percent, which could be worse if not for the massive 85-point gain the index made on 21 March. It seems that plenty of the hype about what the new leaders would implement to boost the economy faltered as early as February when it appeared that the “new kids on the block” would not deviate much from their predecessors. The sentiment received another knockout blow when the government announced a 20 percent capital gain tax on profits from sales of properties.

Similarly, Hong Kong – fast becoming a proxy to the Chinese stock market for international investors who are unable to gain access to the Chinese capital market – tumbled 1,456 points from 23,721 points to 22,256 points, or 6.17 percent, in sympathy with its counterparts in China. The losses, however, were slightly more than what the SSE had shed in percentage terms.

Over here in Singapore, the Straits Times Index (STI) shrugged off the bad sentiment from China and Hong Kong – but also ignored the bullish sentiment in the US – to remain range-bound in the rather flattish pattern. Closing at 3,291 points on 6 March, the STI closed at 3,248 points on 21 March, losing a mere 43 points, or 1.3 percent. This, however, should not be the case because the Singapore stock market has traditionally been highly-correlated with the US stock market until recent years when the STI started tracking everybody else from the US to China and then to Hong Kong.

The DJIA performed admirably from February onwards, first holding onto the 14,000 psychological-support to reach 14,511 points on 21 March. In total, the DJIA gained 502 points, from 14,009 to 14,511, or 3.58 percent. Although this is not an astronomical figure, investors should note that creating consecutive fresh highs day after day is not an easy feat for an economy that has yet to really recover.

Stimulus VS Zero Stimulus

We can now tell the difference between an economy and stock market boosted by stimulus measures and one that has no stimulus measures in place. To make things worse for the latter group, these economies are faced with cooling measures introduced to curb an overheated property sector!

The impact of a stimulus measure as well as investors’ addiction to it is further illustrated by Japan’ s ultra-bullish stock market the moment the Liberal Democratic Party took power. Prime Minister Shinzo Abe immediately allowed a weakening of the Yen to aid Japanese exporters. Moreover, the new government promised a bold target of achieving a 2 percent inflation rate that will inflate assets after facing years of deflation.

With the promise of more money in the financial system by buying government bonds, which analysts criticised as too little to be of any effect, there are growing hopes that the new Bank of Japan governor will do even more. Such moves can only help to boost a stock market that has been addicted to stimulus, hence, the huge jump from 11,191 points on 1 February to 12,468 points on 19 March – a humongous 1,277-point gain, or 11.4 percent! This does not take into account that the Nikkei 225 was at 8,661 points on 31 November 2012, which means that the index skyrocketed 44 percent in a matter of only four months!

We know that stimulus measures simply means fighting a monetary problem with more money and that essentially leads to currency depreciation and, ultimately, inflation and even more debt. However, without stimulus measures, we can safely say that corporate America would have collapsed without the intervention of the Federal Reserve.

Why did Japan wait till now before taking the big leap forward by mimicking the Americans? Is the rise of China becoming too much of a threat? Does the US have anything to do with Japan’s move since the Americans need a strong ally to counter the influence of China just like it did during the Cold War when the Americans supported the reconstruction of post-war Japan and Germany?

The Laggards Look Frail!

Japan and US are two countries boosted by stimulus measures and hot money is attracted by expansionary policies. In the cases of China, Hong Kong and Singapore and, in spite of growing signs that the economic rebound is taking shape for the Chinese economy, all three places are faced with the unenviable problem of having to tackle the problem of rising property prices.
When there are curbs in place as opposed to stimulus measures, investors are unlikely to want to overweight such countries because expansionary policies are unlikely to come from the government due to the possibility of a bubble forming. When faced with choices, investors are more likely to choose an investment destination where there is a higher possibility of growth as well as accommodative policies i.e. Japan and US.

This probably explains why these three Asian markets have underperformed the US stock market.

In the case of China, investors are likely to be more forgiving due to the fact that China’s economy is showing signs of a rebound as highlighted by the better-than-expected showing of manufacturing numbers. Even with a set of strong numbers, the SSE failed to rally in a strong way possibly due to the lack of fresh impetuses by the Chinese government in the form of accommodative policies. This invariably affects Hong Kong and, to a certain extent, Singapore where the government’s stance on foreign workers is, according to the government, likely to result in slower growth going forward.

Unless these three Asian markets play catch up with the US market, a six-week consolidation with minor spike-ups along the way will only open up the indices to more weaknesses once the US stock market corrects. Although the SSE is very likely to shrug off weaknesses in the US market, it will not escape more corrections if falls in the US market is induced by global factors. Once the US stock market starts to correct, as it is already underway on 21 March, the Hong Kong and Singapore markets will follow suit.

The Hang Seng Index may find some temporary relief at 21,100 to 21,500 if 22,000 gives way but any negative trends will be negated once the index climbs above 23,500 – a tall order for the time being given the negative picture of the HSI on the weekly chart.

The STI looks set to test the previous low of 3,234 points reached on 4 March with further support at 3,180. Should the STI stay above 3,150 by mid-April, we can safely say that the index has ended the corrective phase and may be ready to test the resistance at 3,319 for the fourth time assuming there is no earth-shattering news.

As of now, the stock market looks “picture perfect”, hence, investors should be on the lookout for good buys near the support levels. It is still a “buy on dip” market so investors should focus on the fundamentally strong counters that tend to rebound quickly after every correction. Examples of such stocks are the banks, property counters (do beware of potential policies that may curb the sector even further) and the oil & gas sectors.

Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.