|
|
|
|
Asian Turmoil And Its Impact Upon Global Markets
ity the investor in Fidelity's Emerging Markets Fund. The former manager exposed the investors' money to Malaysia four times greater than the average emerging markets fund. Down approximately 25% before the "Asian Crisis", the fund was down 38.5% year to date when the Dow Jones Industrial Average plummeted 554 points on October 27, 1997.
Moving forward, what should investors expect in the global markets? Our market research service, J.P. Morgan, has issued several opinions.
J. P. Morgan opines that the turmoil in the Asian financial markets will depress U.S. growth and inflation, but not significantly based upon what has happened thus far. Unless the crisis becomes much more severe, and it leads to significant spillover effects, U.S. markets quickly will regain the spotlight, and attention will be focused upon the inflation threat of the continuing tightening U.S. labor market.
A key point to remember is that, previously, the Asian turmoil had been confined to four small countries in the Southeast -- Indonesia, the Philippines, Malaysia and Thailand. In total, these markets account for only 4% of U.S. exports, or about .5% of Gross Domestic Product (GDP). However, as the turmoil spread North, the numbers became larger: Emerging Asia as a whole accounts for 19% of U.S. exports, or about 2% of GDP. Moreover, market experts are watching Latin America. If the turmoil spreads there, where demand for U.S. exports has been especially strong lately, U.S. (and global) markets could experience another jolt, perhaps this time more prolonged.
What's the Asian "crisis" all about? Fundamentals. According to J.P. Morgan, the Southeast Asia crisis was triggered by fundamental imbalances that the markets eventually penalized. In several countries, for instance, currencies had become overvalued, and thus less competitive, in global export markets. Also, trade and current account deficits had grown to unsustainable levels. Finally, massive domestic investment had created substantial excess capacity. All of these imbalances were, at times, exacerbated by insufficiently developed domestic control mechanisms or reporting standards.
On the other hand, the fundamentals do not appear to have changed in countries beyond Southeast Asia (such as the U.S.). However, investor sentiment clearly has changed. Instead of being lulled into a false sense of security that markets move in only one direction -- up, investors now seem to be re-evaluating their positions and considering downside scenarios based upon such factors as inflation, corporate profits, structural changes or credit risk. In short, negative investor sentiment has caused a healthy correction of the more excessive valuations. To date we have not experienced the onset of a global bear market (involving not only a negative change in investor sentiment but also an unfavorable change in fundamentals).
Nonetheless, according to J.P. Morgan, investors must focus upon four main risks. First, systematic problems. While an orderly reduction in stretched valuations should not threaten the viability of the global financial system, a wholesale panic can have more dire consequences. This particularly is true in Japan, where the financial system still is reeling from the asset bubble bursting in 1989.
The second risk is competitive currency devaluation. Although currency devaluations have occurred in Asia and, to a lesser extent, the emerging market world, any broader competitive devaluation process (perhaps starting in Japan, then spreading to Europe) could create a very unstable situation that would threaten global economic growth prospects.
The third risk is impact upon real economic demand. So far, only the overheated economies of Southeast Asia have experienced a slowdown in demand. Nonetheless, further significant declines in the global equity markets have the potential to depress business and consumer confidence. This could lead to lower demand and thus slower economic growth globally.
Fourth, investors should consider political risk. Over the last several years, an important ingredient of the improving fundamental picture has been the commitment made by most governments to adopt free market economic management policies. Any sign that there is a shift toward policies with less focus on free market solutions will be interpreted negatively. This, in turn, has the potential to transform a healthy correction into a real global bear market.
|
Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
All content Copyright © 2010 Advocate Compliance Partners, Inc. except where noted. All rights reserved.
One North Franklin Street, Suite 2620, Chicago, IL 60606
Telephone 312-332-0000 | Fax 312-332-0003
|
|
|
|
|
