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Thursday 11 September 2008
U.S. Treasury move may also bail out Asia
With its unprecedented takeover of Fannie Mae and Freddie Mac this week, the U.S. government may have also bailed out Asia’s markets by stanching a heavy flow of equity capital out of the region. View PDF
HONG KONG: With its unprecedented takeover of Fannie Mae and Freddie Mac this week, the U.S. government may have also bailed out Asia’s markets by stanching a heavy flow of equity capital out of the region.
This is significant. Fund managers had been moving money out of the region and Asia Inc. had been slowing down its overseas borrowings in what amounted to early signs of the first capital outflow since the Asian financial crisis a decade ago.
Now, in one fell swoop, Washington has taken over half of all U.S. mortgages, thereby removing one of the big question marks in investors’ minds that for the last six months had made them flee Asia’s high-growth, yet high-risk, stock markets.
Of course, the financial crisis is not over, as a slump in Lehman Brothers’ shares has shown.
But Fannie and Freddie hold outstanding debt of $5 trillion, of which about 20 percent to 22 percent is held by countries like Japan, China, Russia, and South Korea. So having the risk on that debt effectively cut to zero greatly eliminates the chance of a wave of global losses on the companies’ bonds.
“This is a watershed in the market because it reduces risk aversion,” said Dariusz Kowalczyk, chief investment strategist with CFC Seymour in Hong Kong. “Risk has been transferred from the private to the public sector.”
Since mid-May, the MSCI Asia-Pacific stocks index excluding Japan has fallen 26 percent to its lowest level in almost two years.
The money can start to flow back in to Asia, Kowalczyk said. He expects an upward trend for the rest of the year as fund managers reduce the cash element of their portfolios and fill up on equities.
Stock markets in Asia, a part of the world once considered sealed off from the malaise in developed economies, have suffered this year as it became clearer how vulnerable countries like Thailand, Vietnam and even China were to reduced U.S. and European consumer demand and high food and energy prices.
As a result, large asset managers have slashed their holdings of Asian stocks. Their exposure to Fannie and Freddie provided an added incentive to rein in their Asian investments.
An HSBC survey released on Tuesday of global fund managers overseeing $4.2 trillion of assets showed more than a fifth were underweight in Asia excluding Japan in the third quarter, compared with none in the second quarter. The survey was conducted during the first two weeks of August.
No money managers were underweight in Greater China, but those overweight dropped to 63 percent in the third quarter from 86 percent in the prior quarter.
Franklin Poon, an analyst with Fitch Ratings in Hong Kong, watches Asian capital markets closely since they could be harbingers of trend changes in larger money flows like foreign direct investment.
So far there is little indication that FDI flows into emerging countries like China are slowing. By some measures, FDI in China is running at $52 billion, up 46 percent on a year earlier.
“The region is still enjoying strong net FDI inflows, and continues to receive cross border loans from international banks,” Poon said in a report released this week. “On the other hand, foreign purchases into local equity markets have already recorded net withdrawals, and international issuances of debt securities also seem to have slowed down.”
Analysts like Sean Darby at Nomura Securities in Hong Kong believe that heavy flows of money out of Asian stock markets should slow as the spread of Fannie and Freddie bond yields narrow compared with U.S. Treasury securities, signaling a bit of thawing in lending markets.
More U.S. banks could fail and periodically jolt markets, but the bailout should be enough to shift investors’ focus to the attractiveness of low valuation in Asian markets, Darby said.
“Risk appetite will likely return to emerging equity markets and capital account outflows should diminish,” he said in a note.
Investors who are hoping to get more bang for their buck would be well placed in Asia.
The 12-month expected earnings yield of the S&P Asia 50 index minus the 10-year U.S. Treasury note yield, a way to measure equity valuation relative to risk-free bonds, is 4.21 percent, the highest since October 2005.
Of course, reduced risks surrounding Fannie and Freddie neither meant the financial crisis was over, nor that market volatility would immediately die down.
1 comment:
U.S. Treasury move may also bail out Asia
By Kevin Plumberg
Reuters
September 10, 2008
HONG KONG: With its unprecedented takeover of Fannie Mae and Freddie Mac this week, the U.S. government may have also bailed out Asia’s markets by stanching a heavy flow of equity capital out of the region.
This is significant. Fund managers had been moving money out of the region and Asia Inc. had been slowing down its overseas borrowings in what amounted to early signs of the first capital outflow since the Asian financial crisis a decade ago.
Now, in one fell swoop, Washington has taken over half of all U.S. mortgages, thereby removing one of the big question marks in investors’ minds that for the last six months had made them flee Asia’s high-growth, yet high-risk, stock markets.
Of course, the financial crisis is not over, as a slump in Lehman Brothers’ shares has shown.
But Fannie and Freddie hold outstanding debt of $5 trillion, of which about 20 percent to 22 percent is held by countries like Japan, China, Russia, and South Korea. So having the risk on that debt effectively cut to zero greatly eliminates the chance of a wave of global losses on the companies’ bonds.
“This is a watershed in the market because it reduces risk aversion,” said Dariusz Kowalczyk, chief investment strategist with CFC Seymour in Hong Kong. “Risk has been transferred from the private to the public sector.”
Since mid-May, the MSCI Asia-Pacific stocks index excluding Japan has fallen 26 percent to its lowest level in almost two years.
The money can start to flow back in to Asia, Kowalczyk said. He expects an upward trend for the rest of the year as fund managers reduce the cash element of their portfolios and fill up on equities.
Stock markets in Asia, a part of the world once considered sealed off from the malaise in developed economies, have suffered this year as it became clearer how vulnerable countries like Thailand, Vietnam and even China were to reduced U.S. and European consumer demand and high food and energy prices.
As a result, large asset managers have slashed their holdings of Asian stocks. Their exposure to Fannie and Freddie provided an added incentive to rein in their Asian investments.
An HSBC survey released on Tuesday of global fund managers overseeing $4.2 trillion of assets showed more than a fifth were underweight in Asia excluding Japan in the third quarter, compared with none in the second quarter. The survey was conducted during the first two weeks of August.
No money managers were underweight in Greater China, but those overweight dropped to 63 percent in the third quarter from 86 percent in the prior quarter.
Franklin Poon, an analyst with Fitch Ratings in Hong Kong, watches Asian capital markets closely since they could be harbingers of trend changes in larger money flows like foreign direct investment.
So far there is little indication that FDI flows into emerging countries like China are slowing. By some measures, FDI in China is running at $52 billion, up 46 percent on a year earlier.
“The region is still enjoying strong net FDI inflows, and continues to receive cross border loans from international banks,” Poon said in a report released this week. “On the other hand, foreign purchases into local equity markets have already recorded net withdrawals, and international issuances of debt securities also seem to have slowed down.”
Analysts like Sean Darby at Nomura Securities in Hong Kong believe that heavy flows of money out of Asian stock markets should slow as the spread of Fannie and Freddie bond yields narrow compared with U.S. Treasury securities, signaling a bit of thawing in lending markets.
More U.S. banks could fail and periodically jolt markets, but the bailout should be enough to shift investors’ focus to the attractiveness of low valuation in Asian markets, Darby said.
“Risk appetite will likely return to emerging equity markets and capital account outflows should diminish,” he said in a note.
Investors who are hoping to get more bang for their buck would be well placed in Asia.
The 12-month expected earnings yield of the S&P Asia 50 index minus the 10-year U.S. Treasury note yield, a way to measure equity valuation relative to risk-free bonds, is 4.21 percent, the highest since October 2005.
Of course, reduced risks surrounding Fannie and Freddie neither meant the financial crisis was over, nor that market volatility would immediately die down.
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