Fears the European debt crisis could spread and increased political uncertainty resulted in Asian equities falling to their lowest level in 10 months during May.
Global markets are currently witnessing heightened risk aversion and it is difficult to judge when this will end. In Asia, net foreign sales of Asian equities were the highest in more than a decade.
However, because of the ongoing turmoil in Europe, monetary policy will probably remain highly accommodative in most jurisdictions. As a result of this, Nomura, one of Witan Pacific’s investment managers, does not foresee a double-dip recession.
Our view is we are currently going through a bull market consolidation phase. Aberdeen, the other manager in Witan Pacific’s portfolio, is encouraged by the better-than-expected economic data coming out of Asia during Q1 – Hong Kong, Korea, Taiwan, Singapore and the Philippines all saw GDP accelerate while Japan saw growth quicken although consumer prices fell for a thirteenth consecutive month.
Despite these positives, the bad news is outweighing the good. In China, there are worries that moves to cool its runaway property market may not be sufficient to prevent inflationary pressures rising.
The two Koreas have had a major falling out following North Korea’s sinking of a South Korean ship. In Japan, there has been another change of prime pinister – the fifth in the last four years. Although another change of PM is unsettling for markets, it is not expected the incoming Naoto Kan will make any substantial policy changes.
Kan, the former finance minister, is known to favour restoring fiscal balance through an increase in consumption tax and restraints on government spending, while also maintaining easy monetary policies. He is also known to favour a weaker yen. If his positions are reflected in the policies of the new cabinet, they could have a positive impact on the corporate Japanese earnings outlook and market sentiment.
Looking forward, there is little doubt Europe’s troubles will hinder the recovery of the global economy, to what extent is the $64,000 question. However, Asian economies are in better health than the West’s, and although the short term might be a bit bumpy, the medium-term prospects for Asia remain excellent.
James Frost is marketing director of Witan Pacific Investment Trust
