The Hindu Business Line : Asia may falter until oil peaks

Investors have been fleeing Asian markets at a hurried clip this month. According to fund flow tracker EPFR Global, Asia equity funds outside of Japan have seen $8.3 billion in outflows so far this year, including $3.2 billion of redemptions in June alone. Overseas investors in Asia have been spooked on three counts; the prospect of lower economic growth, higher inflation and negative outlook on the domestic currencies. None of the concerns seem to have a near-term or even a medium-term solution in sight. So, Asia suffers.

Foiling oil

Mr Christopher Wood, Chief Equity Strategist, CLSA Asia Pacific, said in a client note that investors should use any counter-trend relief rally from current levels in Asia to reduce ‘beta’ positions, unless there is convincing data that suggests oil has peaked. “The problem is oil is not falling…oil remains above $130,” he opined, adding that a further sharp rise in oil will be plain bad news for Asia. It is. Mounting fuel and linked food prices have driven inflation rates in many parts of Asia to their highest levels in a decade.

Many countries import oil, which OPEC President Mr Chakib Khelil predicts could rise to $150-170 a barrel in the next three-four months. Overseas investors may derive no comfort from US government-run Energy Information Administration’s latest forecast that world oil prices will decline to $70 a barrel in 2015; that’s a long way off. Neither can Central Banks, who look positioned to sacrifice growth in a bid to discipline inflation, afford the wait. Fund managers are recognising that.

More averse

The monthly survey done by Merrill Lynch for June shows that global asset managers have become less positive on emerging markets, which house many of the Asian economies.

Only 25 per cent of these managers were net overweight on emerging markets in June, lower than 31 per cent in May.

Global growth and profit expectations have deteriorated hand in hand with higher expectations of steeper interest rates on the back of inflation, the survey says.

Future economies, which are fundamentally better off over the long-term, are now getting the thumbs down from analysts worldwide as macro variables array against them in the short-term.

“The general credit outlook for Asia-Pacific sovereigns is still predominantly stable, with somewhat lower positive momentum and an increased number of negative outlooks for the most vulnerable sovereigns.

Of the 21 sovereigns, 16 are on stable outlooks,” Kyran Curry and Elena Okorochencko of Standard & Poor’s wrote in their report card released three days ago.

Downgrades

The Sensex – the bellwether for CLSA’s favourite long-term market (India), saw its fair value estimate being cut by 9 per cent by Morgan Stanley as earnings growth is expected to be under pressure.

Analyst Ridham Desai of Morgan suggested avoiding financials, industrials, consumer discretionary, utilities and metals in India. With so many sectors ruled out, this leaves only technology and healthcare, among major sectors, as real estate is clearly out-of-favour.

Others have targeted macroeconomic economic growth. Macquarie Research slashed its forecasts for economic growth in Asia for the Philippines, Thailand and India by at least 1 per cent, from March forecasts.

The prognosis for Taiwan appeared brighter and the anticipation for Hong Kong remained largely unchanged, Macquarie Research said.

More Stories on : Stock Markets | Petroleum

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page