The Hindu Business Line : Asia hopes for relief on liquidity issues

The weekly report on reserve balances showed that US Federal Reserve has lent over $48 billion in the first three days of last week to 20 primary dealers in the US markets. Top investment banks, with the exception of Bear Stearns that had already been rescued from going belly up, have used this facility to borrow from the system. Commercial banks have also borrowed $80 billion from the Fed under the term auction facility.

The Fed also cut policy rates this week by a hefty three-quarters of a percentage point.

A report suggested that Fannie Mae (The Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), both authorized to make loans and loan guarantees, are likely to purchase more mortgage assets to help stabilise the US home loan market.

This would make investors interested in Asia wonder, has the Fed alleviated the liquidity problem, at least temporarily?

Undecided now

It would appear so. But the MSCI Asia Pacific Index still slipped by 0.1 per cent this week. Asian stocks on the whole declined for the third week.

While Japan’s Nikkei 225 Index gained 2 per cent, others such as Vietnam’s VN Index plunged 15 per cent. Hopes of additional credit-market losses being limited did not help the Indian markets much. India suffered losses for the third straight week as selling pressure continued, while buying interest remained absent.

Overseas investors appeared stuck to the belief that the Sensex trading at an estimated forward price/earnings ratio of 17.8 times, remains expensive.

They remained net sellers for the week as equities worth over Rs 1,400 crore were sold.

High profile securities firms such as CLSA and Citigroup hinted at a weak outlook for India. The former opined that the share prices of firms with high leverage, significant forex exposure and those that require commodity inputs remain vulnerable.

Further, it reiterated that a downward revision of price targets and multiples ‘justifiably’ reflected these risks.

New vent

Citi was kinder to emerging markets even though it warned of the beginning of the ‘The Great Unwind’. The bank included countries which have grown to rely too much on borrowed money, to the ‘to-be-avoided’ list.

Leanings toward emerging market countries were natural as the bank’s global equity strategy team prescribed aversion towards developed nations like the US.

The European banking sector is geared 40 to 1 on average, according to Citi’s European bank research team. Credit Suisse’ results are expected next week; this has been preceded by a forewarning that it could the first quarterly loss since 2003. Problems spreading from the US to Europe, now?

The latest weekly fund flow data from EPFR Global shows a preference for Russia Funds by global investors with a net inflow of $75 million in the week to last Wednesday. Compare this with outflows in all other BRIC nations and a trend emerges.

For Russia, this was the eight consecutive weeks of inflows. China funds have suffered redemptions in nine of those weeks, Brazil has been negative for eight weeks and India funds have only been cash flow positive for three weeks, EPFR said.

The election of Mr Dmitry Anatolyevich Medvedev as Russian President has had a calming effect. It remains to be seen whether Taiwan too finds respite from its electoral verdict as it goes to polls over the weekend.

Back to cash

Lastly, commodities, the star asset class for 2008, witnessed profit booking as investors switched to worrying about demand, with the US limping.

Investors who had poured money into gold, oil and other commodities booked profits this week. The Reuters/Jefferies CRB Index of 19 commodities, which hit a record on February 29, fell over 8 per cent this week.

There is no clear sign of money flowing back to equities again. From stocks, cash, commodities and now back to cash.

Though Asian markets may not have much to hope from the stream of economic data from the US on existing home sales (March 24), consumer confidence (March 25), durable orders and new home sales (both March 26); the flow of negative news may be slower.

“The Federal Reserve’s decision to create a lending facility for primary dealers and permit a broad range of investment grade securities to serve as collateral improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table” said Mr Richard S. Fuld, Jr., Chairman and Chief Executive Officer of Lehman Brothers Holdings Inc in a recent statement. Asia, we are sure, is also keeping its fingers crossed.

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