Asian Markets: Surveying the Damage
On the day after the Feb. 27 Chinese stock market meltdown, the rest of Asia continued to feel the aftershocks. Markets in the region tumbled Feb. 28, after investors booked profits from the bourses' recent strong rally, shaken by the sharp drop in Chinese stocks the previous day.
Though the next-day sell-off led many bourses to suffer their sharpest losses since September, 2001, these declines came in the first half-hour of trading, and most came back from session lows. Chinese stocks actually rebounded on Feb. 28, with the Shanghai index coming back 3.9% after plunging 8.8% a day earlier in its biggest daily drop since 1997.
Though this correction from rich stock valuations might potentially go further, strong fundamentals continue to make the region attractive to investors. Indeed, Asian currencies remained firm in the face of the equity sell-off, with the Chinese yuan strengthening to a new high vs. the U.S. dollar during the two terrible days, and the Japanese yen pulling back only slightly on Feb. 28—after its biggest gain in 19 months vs. the U.S. dollar on Feb. 27—to its strongest level since mid-December.
The global equity sell-off was aggravated by a warning Monday evening from former Federal Reserve Chairman Alan Greenspan about potential vulnerability of the U.S. economy to a downturn. The world economy would no doubt also be vulnerable to fallout from any consequences from the stock sell-off for the Chinese economy, which, along with the U.S., remains one of the two key engines of global growth.
However the Chinese economy has sustained notably steady growth over the past two decades in the face of periodic sell-offs in its stock market. We still expect solid world growth in 2007, leaving the strongest four-year growth stretch in our own dataset—dating back to 1984.
Here is Action Economics' look at how Asian markets fared the day after the Great China Sell-Off:
China: Shanghai's stock market rebounded 3.9% Feb. 28, after it plunged 8.8% the previous day, its biggest daily drop since 1997. Profit-taking by local funds snowballed on Feb. 27 after the Shanghai index closed above 3,000 for the first time on Feb. 26. Those gains had brought the cumulative increase so far this year to 14% on top of the 130% gain in 2006, making Shanghai one of the best-performing markets in the world. Institutions scrambled to lock-in gains and raise funds to pay dividends in March. Turnover in Shanghai A shares ballooned to an all-time high.
Traders attributed the plunge to hectic speculation, some noting how prices had been bid up on hope for some market-friendly policies from the National People's Congress session in Beijing in early March, with much of the potential good news already priced into equities.
China's government has introduced several measures over the past year to cool an investment boom. However, there was little in the way of actual major news on Feb. 27, and the fundamental outlook remains for continued robust GDP growth in 2007 near the average of around 10% during the past four years through 2006.
Japan: The Nikkei 225 stock average may have been set for its own correction, having gained 6.9% in 2006, and another 5.7% during this year through Feb. 26 to reach its highest level in nearly seven years. It eased 0.5% on Feb. 27, and was down as much as 4.1% on Feb. 28, before finishing the session off by 2.85%.
Fundamentals are supportive of the recent uptrend in stocks, with the Japanese economy growing moderately and in its best shape in over 15 years, while corporate profits are now being boosted by a competitive yen valuation vs. other major currencies.
Hong Kong: The Hang Seng Index rose 34.2% in 2006, and had been up another 2.7% during this year through Feb. 26, before falling back 1.8% on Feb. 27. It declined as much as another 3.8% on Feb. 28, before finishing the session down 2.5%.
Consistent with the stock-market rally last year was Hong Kong GDP growth at 6.8% in 2006, after 7.3% in 2005, with growth expected to continue around 5.0% in 2007.
Singapore: The market is understandably jittery after the benchmark Straits Times Index soared 27.2% in 2006 and had climbed another 10.8% so far this year through Feb. 26. It fell back 2.3% on Feb. 27 and slid as much as an additional 6.0% on Feb. 28, before finishing the session lower by 3.7%.
Like Hong Kong, the Singapore economy is enjoying robust growth, with GDP rising 7.9% in 2006 after 6.4% growth in 2005. It's expected to moderate only somewhat to 5.5% growth in 2007.
South Korea: The benchmark KOSPI index was one of the more lackluster performers in the region in 2006, when it rose 4.0%, followed by a cumulative 2.5% rise so far this year through Feb. 26. It fell back by 1.0% on Feb. 27 and was off as much as another 4.2% on Feb. 28, before scaling back its loss to 2.6%.
Nonetheless, the backdrop remains favorable for South Korea, as GDP growth—at 5.0% in 2006 and projected at 4.5% in 2007—is more than respectable by world standards.
India: The Mumbai Sensex Index was one of the world's star performers in 2006, soaring 46.7%, in the face of GDP growth at around 9.0% that's expected to moderate to only about 8.0% this year. The index had fallen back 1.0% during 2007 through Feb. 26, perhaps as accelerating inflation has raised fears of central-bank tightening. The index slipped 1.3% on Feb. 27 and was off as much as 5.0% on Feb. 28, before finishing lower by 4.0%.
Thailand: The Stock Exchange of Thailand Index (SETI) has been a laggard performer amid the political turmoil of the past year. It declined 4.7% in 2006, more than accounted for by the sell-off upon the announcement of capital controls in mid-December, but had rebounded by 1.3% so far this year through Feb. 26, despite the additional shock of a New Year's Eve Bangkok bombing.
The SETI slipped 0.7% on Feb. 27, and was off another 2.0% Feb. 28, when it received an additional shock with the surprise resignation of its Finance Minister. It slipped as far as 2.8% for the day, but then came back somewhat unexpectedly to trim its loss to 1.0% by the end of the session.
Australia: The S&P ASX index in Australia, typically commodity-driven, gained 19.0% in 2006 and had gained a further 6.6% increase in 2007 through Feb. 26. It slipped 0.8% on Feb. 27, and was down as much as another 3.5% on Feb. 28, before finishing down 2.7% for the day.