Global Economics

Asia Stocks: Wall Street Woes Hit Hard


Asian stocks declined broadly, but regional markets are expected to rebound unless there is a worse-than-expected economic downturn in the U.S.

Stock markets across Asia were pulled down sharply July 27 by the previous day's rout on Wall Street that saw the Dow Jones industrial average and Standard & Poor's 500-stock index fall 2.3% and register their biggest declines since late February. However, it would take a far bigger downturn in the U.S. economy than currently forecast from the housing market bust stateside to derail Asia's generally strong economic outlook this year and in 2008, economists and analysts contend.

There is no denying that the short-term market pain was felt far and wide from the sell-off in New York. The Nikkei 255 stock average in Tokyo fell 2.3% in one of its biggest one-day declines this year, while South Korea's Kospi declined 4.1%. Markets in Hong Kong and Singapore closed down about 3%. Australian stocks slumped 2.8%, the biggest one-day decline this year, while stocks in Mumbai were down more than 3% in late afternoon trading. China's white-hot stock markets in Shanghai and Shenzhen were mixed and largely unaffected by the turmoil in global equity markets.

The biggest decliners in the region were major Asia exporters such as Toyota Motor (TM), Samsung Electronics (SSNHY), mining giant BHP Billiton (BHP), and Taiwan Semiconductor (TSM), all of which have considerable direct or indirect profit and sales reliance on the $12 trillion-plus U.S. economy.

Emerging-Market Cash-out

Whether this is a one-off reaction to a bad day on Wall Street or the beginning of something more substantial depends on whether the ongoing upheaval in the subprime segment of the mortgage market and housing industry declines take a bigger-than-expected bite out of the U.S. economy.

In some Asian emerging markets such as South Korea, where stock prices have shot up more than 30% this year, investors may have been looking for a reason to sell. Chang In Whan, chief executive at fund manager KTB Asset Management, noted that investors in "Korea and other Asian emerging markets have been looking for excuses to sell after sharp recent gains, and the shock from the U.S. over subprime mortgage loans was a perfect one."

He thinks worries of a deep credit crunch in the U.S., and a resulting tightening of global credit or perhaps a messy unwinding of the yen carry trade (the practice of borrowing cheaply in yen and investing in high-yielding foreign investments) had been hanging over the markets for months, and thus aren't new. Chang also thinks the market consensus continues to rate these risks as rather low.

Prolonged Asian Drag Unlikely

Nor does it look like the U.S. is in immediate danger of falling into recession. On July 18, U.S. Federal Reserve Chairman Ben Bernanke in testimony to the House of Representatives' Financial Services Committee disclosed that the Fed was slightly lowering its forecast for 2007 growth from what it said back in February. The "central tendency" is for the economy to expand 2.25% to 2.5% from the fourth quarter of 2006 through the fourth quarter of 2007, he said. That's down from a forecast of 2.5% to 3% in February. He said the Fed was lowering its 2008 forecast by a quarter-point, to 2.5% to 2.75%.

Standard & Poor's Chief Economist David Wyss expects gross domestic product growth of 2.5% for the second half of the year and 2.1% for the full year and improving into 2008. (S&P, like BusinessWeek, is a unit of The McGraw Hill Companies (MHP).) He also calculates that the housing decline has clipped about one percentage point of growth from the GDP for the U.S. this year and doesn't expect housing prices to bottom out until the spring of 2008.

Those numbers aren't spectacular. Yet they suggest the odds of a U.S.-led downturn of Asian economies are pretty low. Indeed, in a July 27 note to clients, Credit Suisse equity analyst Shinichi Ichikawa suggested to clients to buy Japanese stocks going forward. "With (Japanese) corporate earnings so strong, conditions are in place for Japanese equity markets to outperform major markets toward the end of 2007," Ichikawa wrote.

China Bolsters the Region

Lehman Brothers (LEH) economist Mingchun Sun contends "it is too early to say" if the U.S. market turmoil would cause the kind of steep economic decline that would hit Asia hard. Lehman is forecasting 8% growth in Asian economies (excluding Japan) this year and in 2008.

Lehman figures that tame inflation, strong government budgets and robust foreign currency reserves would help regional governments cope with a slower global economy. A booming China means that intraregional trade now represents about two-fifths of the region's exports.

If the U.S. downturn exceeded expectations or the American economy fell into a recession, which is viewed as unlikely now, regional economies such as Singapore, Hong Kong, Thailand and Taiwan would be most vulnerable given relatively weak consumer demand and heavy reliance on exports, according to Lehman's reckoning.

China's sizzling economy, in contrast, likely would experience only minor pain. The mainland expanded at 11.9% in the second quarter, and most economists have upgraded their full-year 2007 forecasts to 11%-plus in recent weeks.

Brian Bremner is BusinessWeek's Asia Regional Editor based in Hong Kong. Moon is BusinessWeek's Seoul bureau chief.

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