International | Jul 02 2006
By Chris Shaw
Asian equity markets were among the worst hit during the May-June correction, with the more expensive markets of India and Japan in particular seeing share prices driven lower and markets in the region generally coming back from recent highs.
As Arjuna Mahendran, head of research for Asia/Pacific for Credit Suisse notes, much of the correction was the result of the strong correlation of Asian markets to the US, given the importance of the American market in terms of exports for Asian economies.
This leads him to suggest the worst of the correction has now passed, as on Credit Suisse’s estimates US growth will begin to reaccelerate in the December quarter this year, which should be a catalyst for further gains in Asian markets. He suggests those attempting to time a re-entry into Asian equities should therefore look for signs of any such pick up in US growth.
He points to a number of factors supporting his view of a positive outlook for Asian stocks, including strong economic fundamentals across most of the region thanks to good growth in both corporate profits and economies generally. Additionally, in his view the recent correction has taken out some of the hot money, in the process restoring some value to markets and so making them attractive to what he calls the build-up of real money waiting to be invested.
Inflation remains an issue for investors to keep an eye on, Mahendran pointing out the Chinese in particular appear concerned about the inflationary pressures coming from record levels of investment growth. He expects the Chinese authorities will continue introducing measures to stop the economy from overheating, with another increase in official rates likely along with further measures to limit bank lending, particularly in the property sector.
According to Mahendran there is little threat such a measure will impact on overall growth in China though, as interest rates would then only be at neutral levels and so not restrictive to the economy as a whole. While in the short-term investors can expect to see some ongoing volatility as export performance remains mixed, Mahendran expects improving trade performance later in the year to provide a catalyst for a resumption of the uptrend in Asian markets.
