Asia: Market Mayhem Worsens

The U.S. mortgage market crisis continues to pummel Asian equity markets, and the selling was fast and furious across the region

by Ian Rowley

Aug. 16 began in Japan's capital city with a 4:15 a.m. earthquake and ongoing tremors that continued nearly right up to the opening of trading on the Tokyo Stock Exchange. That turned out to be the perfect metaphor for another day of heavy losses at that bourse—and even more ferocious ones in Asian emerging markets such as Seoul, Jakarta, and Manila, where stock prices plunged in the 6% to 7% range.

Over the past two weeks, the market mayhem emanating from the U.S. mortgage credit crisis has steadily vaporized wealth across the region. By one closely watched measure, the Morgan Stanley Capital International Asia-Pacific Index, regional stock markets tracked and weighted by size in the benchmark have just about surrendered all their gains in 2007. "These are very difficult market conditions. It is extremely ugly," says Paul Schulte, chief equity strategist ex-Japan at Lehman Brothers (LEH) in Hong Kong.

Every major Asian market took it on the chin today. The Nikkei 225 Index slipped 327 points, or 2%, taking it to the lowest level since Nov. 29. The index, which at one point was down 616 points, recovered in late trading but has still lost more than 1,000 points in the past week. The Hang Seng index shed 3.25% and even stocks traded in Shanghai, which haven't lost much ground in recent weeks, lost 2%-plus of their value. (Still, the Shanghai Stock Exchange Composite Index is still up 78% so far this year.)

The damage was particularly harsh in Seoul, where the market was closed on Aug. 15 for a holiday. South Korean stocks went into a free-fall and the Kospi lost 6.93%, its biggest drop in five years. Foreign investors, whose ownership accounts for more than a third of the market's capitalization, have far less of an appetite for emerging-market assets, given the great uncertainty hanging over credit markets worldwide.

Kiwi Dollar Decimated

"It is not a domestic issue but a global problem," says Chung Doo Sun, senior fund manager at PCA Investment Trust Management. "A nervous trading pattern will persist as long as the subprime problem stays." Downturns of a similar magnitude were felt in Jakarta, where stocks fell 6.6%, and in Manila's bourse, where shares tumbled 6%.

And one Asian currency, the New Zealand dollar, suffered its biggest drop in 20 years vs. the greenback and fell sharply against the Japanese currency, as investors dumped high-yielding government bonds. New Zealand government paper had been a favorite among yen "carry trade" investors, who borrow yen at low interest rates in Japan to finance better yielding investments abroad.

In the region's biggest economy, the carnage was such that the Bank of Japan again felt the need to inject funds in to the money markets. The BOJ, which had absorbed $13.7 billion of funds from the money market on Aug. 14, following earlier injections, today added a further $3.4 billion.

Yen Touches Five-Month High Against Greenback

In Tokyo, financials and big exporters again bore much of the ebbing investor confidence. Shares in Mitsubishi UFJ Financial Group, Japan's biggest bank, were down 2.6%, having shed 5.3% a day earlier. Sumitomo Mitsui Financial Group and Mizuho fell 3.2% and 1.5% respectively. Year to date, the stock prices of Japan's Big Three banking groups have each fallen by more than 20%.

Among leading exporters, Toyota (TM) and Honda (HM), down 2.7% and 3.6%, respectively, as the yen appreciated, briefly touching a five-month high against the dollar of 115.71 to the dollar. In late June, the yen-dollar rate was 123.