Investment Summary

Source : Daiwa

Asian markets fall further, but no change to the long-term upward trend

Investment summary

At the beginning of this week, Asian stock markets, including that in Japan, suffered a further sharp fall, due mainly to: 1) the sudden drop in natural-resources prices, which continued from last week, leading to a view that the recent flow of speculative funds into developing country markets would reverse itself, 2) concerns that increasing inflationary worries might lead to further interest-rate hikes in the US, in turn leading to a cooling of the US and global economies, 3) concerns about the continued monetary tightening in China, and 4) a feeling that overseas investors would turn increasingly to profit-taking as Asian currencies fell back.

As we pointed out last week, we believe the fall in the Asian markets does not reflect any sudden weakening of the fundamentals, and is better seen as a technical correction. Since the previous flow of funds into Asia was so great, once resource prices fell back sharply, there was a major outflow of nervous investment capital, which turned into a flood.

We believe the sudden correction in Asian stock markets does not represent a change in direction to the medium to long-term uptrend. The main reasons for this are: 1) stocks do not look particularly overvalued, and we think the situation is a long way from being a speculative `bubble', 2) since inflation remains under control, there are few concerns about a sudden sharp increase in interest rates, 3) country risk in Asia is extremely low, and the region's resilience to changes to the external environment has increased considerably compared with the time of the Asian currency shock, and 4) economic growth in the Asian region remains higher than in most other developing economies, with the result that it should be relatively easy to attract both domestic and overseas capital.

A detailed note on Asian markets will be published later





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