Is this a good time to buy Asia?

The short answer is "no", according to Bloomberg columnist Andy Mukherjee in today's piece, Asia's Growth Is No Foil for Vanishing Money. In the wake of a global liquidity squeeze, the risk of further falls in equity markets cannot be discounted:

A slightly longer answer is that this may not be the time to get swayed by long-term economic fundamentals of Asian emerging markets. Expectations of strong growth alone may not be much protection in the face of disappearing liquidity.

Assets in mature Asian markets -- a property in Singapore, for example -- may not be all that sexy; they may, however, be a better bet right now than software company stocks in India. True, stock-market gyrations apart, the real economy in most developing Asian nations is doing very well.

The only big exception is Indonesia, where there's a risk of stagflation. PT Astra International, the nation's biggest motor- vehicle retailer, now expects Indonesia's combined new car sales to decline as much as 44 percent this year.

One growth hot-spot is India. The Indian economy will expand 7.7 percent in the current fiscal year ending in March 2007, the National Council of Applied Economic Research in New Delhi forecast last week. Assuming normal rainfall and food production, the slowdown in the pace of economic expansion -- from 8.1 percent in the previous year -- will be marginal, and largely a result of the monetary tightening that must now occur to combat inflation.

Just because growth has a solid footing, it doesn't follow that the recent 17 percent slide in equity prices over eight days has taken all the froth out of valuations and that the Indian market is an ``opportunity to buy'' for small investors, as Finance Minister P. Chidambaram said last week.

Winnie Ma and other researchers at Nomura International (Hong Kong) Ltd. said in a May 22 report that the Sensex, India's benchmark equity index, may have a ``fair value'' of 7000 points. It closed last week at 10,809.35, having recovered some 3 percent from its May 22 close. This rally is too risky for small investors to start buying again.

Watch the rupee. A combination of falling currency values and rising short-term interest rates would indicate that ``risk aversion is rising, liquidity is being withdrawn faster than the authorities can introduce money, while foreigners would be more likely to be repatriating funds,'' the Nomura researchers say.

Comments

[Carl]

How can there be a risk of stagflation in indonesia??

Agree that input prices are increasing, but that is happening the world over. The Indonesian economy is forecast to grow at 5.5% this year (06), and should be even quicker in 2007, when the Central Bank start decreasing rates from the current 12.75%. When that happens watch the consumer driven economy fly and Astra sales go with it. The Indonesian central bank is one of the few in Asia that will be cutting rates over the coming year, as they have already taken the pain from higher global oil prices (when they cut the fuel subsidy and doubled prices back in Sept 05). As a result inflation spiralled to 17%, interest rates moved to slow spending and attract capital inflow. Now we are seeing an economy that is ripe to move in 2H06/2007 as the year-on year inflation figures drop out in October allowing the bank to further reduce rates.

Astra is only having a tough time at the moment because it is an interest rate sensitive stock. The Indonesian consumer has relied on cheap credit for the past 3 years which has fuelled domestic spending, and is happy to sit back and park his savings in a bank earning 12% interest, rather than spend when borrowing costs are high. He will return when rates reduce below 10%, and the economy starts to motor, whilst the US will be the one coping with stagflation, and the rest of Asia is in tightening mode.

Agree that expectations of growth, will not be worth much in the face of disappearing liquidity - but comments of Indo stagflation are way off the mark. Mkt may not be cheap relative to asia-ex, but consensus is for 15% earnings growth in 2006, 13% for 07 - looks good enough for me. Banks, property and finance related stocks for the bold will be big winners in 2007, unless the domestic demand recovery is so strong that the current account weakens significantly causing the central bank to raise rates to slow demand. That is the start of another cycle however!!!

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