What happened to Asian decoupling? Wasn’t Asia – thanks largely to fast-growing heavyweights China and India – supposed to shrug off the financial crisis and economic slowdown in the US?
So far this year jitters over America have left no region of the world untouched. Indeed, while the MSCI USA index is down by 6.5% this year, the MSCI Emerging Market and Emerging Asia indices have lost 8% and 12% respectively in dollar terms, despite a strong rally over the past few days; India, often touted as one of the safer developing markets – owing to its relatively low exposure to exports – is down 28%.
Asian stockmarkets have been unable to decouple, because as global investors have expanded their range in recent years, they have deepened the connections between various markets, says Joanna Slater in The Wall Street Journal. And in rocky times, institutional investors ditch riskier assets, such as Asian and emerging stocks, to cover losses or fund withdrawals in other areas.
Capital can flow where it likes, so “if there’s an upset in one part of the world, it affects all other markets”, says Jonathan Compton of Bedlam Asset Management. The bottom line is that in times of crisis, correlations between stockmarkets increase “and there is nowhere to hide”, says Prieur du Plessis on Seekingalpha.com.
So much for stockmarket decoupling; how about economic decoupling? Asia ex-Japan’s export growth has held up well so far, but US consumption, the main driver of American demand for the region’s products, is now “drying up”, and leading indicators for Asian trade are “pointing south”, says Capital Economics. Export growth for much of the region looks set to slide and may even turn negative in the next few months. Growth in the most tradedependent economies – Malaysia, Singapore and Taiwan – is likely to be significantly lower this year.
Every country in Asia will see slower exports this year, agrees Paul Donovan of UBS. Domestic demand is weakening in America and Europe, which, with Japan, comprise 70% of the world economy. As Citigroup has pointed out, 61% of Asian exports are ultimately consumed in Europe, America and Japan.
Meanwhile, Asian consumption is not yet significant enough to offset a major decrease in US consumption, let alone slowing demand in both Europe and the States. As Stephen Roach of Morgan Stanley points out, China and India jointly account for just a sixth of American demand. Consumption in the BRIC countries last year totalled a third of the US figure, notes CLSA’s Christopher Wood.
Asian earnings-per-share growth “will drop off a cliff” if import growth starts to slow in Europe as well as in America – which seems likely as the US slowdown becomes a global slowdown, says a Citigroup Asia Equity Strategy note. Margins have been squeezed amid higher commodity prices and volumes have been the main driver of profitability.
What’s more, the current 2008 earnings growth forecast for the region, 8.4%, looks unrealistic and valuations are far above average. Asia ex-Japan is on 2.3 times book value, while 1.3 has been typical in American recessions in the past. If this slowdown is only half as bad as the 1990 or 2001 episodes, markets could still fall by another 20%. “The worst is not behind us.”