by ishak » Mon Sep 22, 2008 11:26 am
Asia sheltered thus far
BT, 22 Sep 2008
Some described it as a once-in-a-life-time event. The unfolding of the financial crisis in the West sent stock markets globally into a tailspin. Early last week, the US markets fell the most since the Sept 11, 2001 terrorist attacks. But when the US government stepped in with the mother-of-all bailout plan and banned naked short-selling, and a number of central banks chipped in to inject liquidity into the markets, investors' relief sent Wall Street into its biggest two-day rally since October 1987. Almost all the losses earlier in the week were recovered.
The blue-chip Dow Jones Industrial Average fell merely 0.29 per cent in the week to 11,388.44. The broad-market Standard & Poor's 500 index rose 0.27 per cent to 1,255.08 and the technology-heavy Nasdaq composite managed a gain of 0.56 per cent to 2,273.90.
However, the jury is still out as to whether what the US government is doing is enough to diffuse the crisis. 'It's like having a heart attack, and you go and get your chest cracked open and get it fixed, but the next morning you're still hurting,' Reuters quoted Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas, as saying. 'This has been a beast of biblical proportions. Nobody has seen anything like it.'
After curbing short-selling and guaranteeing mutual funds in an effort to stabilise financial markets, the US government last week said it is preparing to mop up hundreds of billions of dollars in bad mortgage debt. Sources put the numbers at between US$500 billion and US$800 billion.
'We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses,' US Treasury Secretary Henry Paulson said. 'The federal government must implement a programme to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.'
The US government has pledged more than US$1 trillion to prop up the financial system and housing market. The US Treasury said on Friday it would use US$50 billion to back money-market mutual funds whose asset values fall below $1.
Banks worldwide have suffered more than US$500 billion of writedowns and loan losses since the global credit crisis began more than a year ago. The crisis grew more acute this month with government takeovers of mortgage-finance companies Fannie Mae and Freddie Mac; the bankruptcy of Lehman Brothers Holdings Inc; Merrill Lynch & Co's agreement to be bought by Bank of America Corp; and a bailout of insurer American International Group (AIG). This came just six months after a government-backed rescue of Bear Stearns Cos.
Despite the US government and global central banks' measures, questions remain about their ability to contain a credit crunch that has kept global markets lurching from one crisis to another for more than a year. 'The bottom line is, it doesn't do anything to address the genesis of the whole problem, which is housing,' Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in Boston, was quoted by Reuters as saying. 'It treats the symptoms, not the root problem. Housing prices will keep going down, and that means more bad loans, more writedowns, more pressure on bank balance sheets.'
In Singapore, shares are expected to remain volatile as investors await assurances that moves to address a deep global financial crisis will bring results, dealers said. 'We're in a period of a very volatile market,' AFP quoted Chan Tuck Sing, dealing director at UOB Kay Hian brokerage, as saying. 'It doesn't take very much to tip over one side or the other.'
In the week ended Sept 19, the blue-chip Straits Times Index closed at 2,559.07, down 11.60 points or 0.45 per cent for the week.
Average daily volume traded for the week was 1.44 billion shares valued at $1.77 billion, compared with 966.75 million shares worth $1.32 billion the previous week.
Smaller-cap stocks, however, did not have such luck as to recover most of their losses for the week. As our portfolios show, most still ended significantly lower - up to 11 per cent lower.
In comparison to the maelstrom in the West, Asia has been relatively sheltered thus far. According to Jan Lambregts, the corporate balance sheets in Asia are in better shape now than in 1997 and 2001. Leverage is less of a problem.
The banking sector here is also healthier. And policy makers now have more degrees of freedom when it comes to monetary, fiscal or foreign exchange policies because of the increased foreign exchange reserves, improved fiscal balances, better current account balances and structural reforms.
'Asia is the best region to be in next year,' he said. But he cautioned that although Asia can take a punch, there are no winners in a protracted global slowdown.
You have to learn the rules of the game. And then you have to play better than anyone else.
- Albert Einstein