Asia market update

Market Wrap:

Asia Pacific equities fell across the board on Monday after Friday’s worse-than-expectedUSjobless data kicked out another market support and more investors sought safe havens, such as US Treasuries and other high quality government bonds. The US Dollar rose and crude oil fell. TheUSjobless report sent the Dow Jones Industrial Average tumbling on Friday, erasing all gains year-to-date as investors reassessed the recovery outlook. Developed market bourses such asTaiwan,JapanandKorea, were hardest hit andJapan’s Topix Index fell to its lowest level in almost three decades. Developed Asia Pacific equity markets are being hit specifically by the outlook for profits amid slowing global growth whereas emerging economies are being hit by growing risk aversion and falling commodity prices. 

Asian markets faced a “perfect storm” situation this morning after news on Friday thatUSunemployment rose to 8.2% in May from 8.1% the previous month and payrolls increased by 69,000 last month, less than average market forecasts. The news compounded investor fears that a much-vauntedUSrecovery may be stalling. Adding to the gloom, there were further signs thatChina’s economy is slowing after news that the non-manufacturing purchasing managers’ index inChinafell to 55.2 in May from 56.1 in April. Meanwhile,Europeis still grappling with ongoing sovereign debt issues and the possibility of a Greek exit from the Euro-zone. Mariano Rajoy,Spain’s Prime Minister, called at the weekend for Euro-zone leaders to step up efforts to protect Euro-zone banks.  

Taiwan saw some of the heaviest falls, and market watchers said the impending introduction of a capital gains tax there was exacerbating nerves. Looking at sectors and stocks, Sony Corp was a notable faller on fears profits will be hit by a downturn in theUSmarket, where the consumer electronics giant reaps 20% of its sales. Honda and Canon fell for similar reasons as did Samsung Electronics inKorea. Mining giant BHP Billiton Ltd. dropped as metal prices fell andChina’s CNOOC Ltd. declined as crude oil prices extended a recent slide. InHong Kong, exporters such as clothes retailer Esprit Holdings were among the hardest hit.

CIO Comments:

Dominic Rossi, Global CIO, Equities:
“In recent days equity markets have begun to discount the fact that the economic slowdown is global in character rather than being purely a European phenomenon. The USeconomy recovery to date has been weak, supported by a fiscal deficit rather than from productivity improvement. The weaker USemployment picture, coupled with the oncoming fiscal cliff, means one of the key props to equity levels is now giving way. The Asian export model is beginning to feel the constraints on the western consumer, which means growth levels across the BRIC nations are now declining.

“Conditions in Europe continue to deteriorate, and for sometime we have argued the continent is following the same path as Latin America over a decade ago. We feel a Greek exit is likely and that Spain will be forced on to a formal IMF-backed programme before long.

“Equity volatility will remain high during this period, and consequently equities will remain a relatively cheap asset class. The prospect of a rerating is still some way off, perhaps years, until many of these fundamental problems have worked their way through. One positive note is we would expect commodity prices to fall sharply in this environment, which we consider a pre-condition to the next advance in equity prices."

Andrew D Wells, Global CIO, Fixed Income, Investment Solutions & Real Estate:
“High quality government bonds continue to be the place of refuge in these very turbulent markets, we are now seeing negative yields on a number of short term government bonds, and most developed market 10-year bonds are now trading well below 2%, a sure sign that there is a complete lack of risk appetite.

“In these situations it is no surprise that corporate bond markets in Europe andAsiaare struggling against technical factors, however, demand for yield is maintaining support for all but the weakest of credits. While most commentators would agree many of these government markets are overpriced, clearly if the central bank response to the current slowdown is not clear and meaningful, the position may remain for some time. However there is some talk this morning of a change in attitude towards the issuance of Euro-bonds, and if this were to take place, we could see quite a sharp correction.

 “I think that the more recent volatility is more concerning. Most Asian markets had come to rationalise and price in the impact of the periphery inEurope, and since they had little direct exposure, they were less concerned with its continuing political and economic gyrations. However, the situation inChinaand theUSis much more serious, it is this uncertainty that we are currently feeling.”

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