International | Jul 04 2006
By Chris Shaw
During the market correction of May and June Asian ex-Japan markets were among the worst performers globally, with India and Indonesia in particular experiencing heavy bouts of selling that saw significant falls from previous highs.
As ABN Amro points out, much of the selling was from fund managers rather than local investors, a point highlighted recently by the likes of Citigroup as well. The funds essentially became forced sellers of stocks thanks to significant net redemptions from their funds under management. The broker notes figures show total average redemptions during the correction period of US$975m weekly for Asia ex-Japan funds.
This stands in contrast to figures for the week to June 28, which showed average net redemptions of just US$59m, a major contributing factor behind last week’s recovery in Asian markets.
While the bounce was a positive it doesn’t signal a new bull market in the broker’s view, as it suggests there was more than likely some window dressing for the end of the quarter and the cash holdings of a number of funds remain low. As a result, it sees the next few months as a period of consolidation, with volatility likely to remain higher than average on lighter than normal turnover.
In specific markets it sees potential for both Korea and Taiwan to experience further short-covering in coming weeks, while it remains cautious on India and Indonesia even after the corrections in both markets.
Such a consolidation is particularly likely in the broker’s view given the prospects remain for a slowdown in US economic growth, with such an outcome expected to impact on Asian corporate earnings given the importance of both exports generally and exports to the US in particular. Again, a point brought forward by other experts as well.
In strategic terms, the broker suggests such a market outlook means investors should look to sell exposure to exporters and global cyclical stocks on any rally in the market, while buying companies with a domestic focus and those giving exposure to asset plays on any market dips.
In market weighting terms, the broker’s overweight country exposures are Hong Kong, Korea, Singapore and the Philippines, while it is neutral towards both Malaysia and Taiwan. The broker suggests being underweight China, India, Indonesia and Thailand.
