Nomura remains bullish on Asia

MANILA, Philippines  - The recent financial turbulence in Asia will unlikely result into the region turning into a bear market as investors are expected to realize its sound economic fundamentals once there is clarity on the fate of US stimulus measures.

“We believe that the market sell-off in Asia ex-Japan is simply a healthy short-term correction, not the start of a bear market,” Nomura economist Rob Subbaraman said in a research note on Wednesday.

“After correction, if investors remain more discerning about macro risks, there will be more differentiation across Asia,” he added.

Stocks plummeted, while bond yields rose for the past month on fears the US Federal Reserve would scale down its stimulus measures that have flooded the world economy with cheap money for the past five years.

The end of stimulus measures  is raising concerns that cheap money will be withdrawn and that interest rates will soon be hiked in the US, prompting investors to pull out their emerging market portfolios back to the world's largest economy.

The Federal Open Market Committee— the Fed’s policymaking body— will finish its two-day policy meeting on Thursday and words from its chairman, Ben Bernanke, should provide “forward guidance” on the fate of quantitative easing (QE) to the market.

“We believe that once it is understood that the QE unwind will be done very gradually, capital inflows should return to Asia,” Subbaraman said.

Halfway through June, foreign investors became net sellers— meaning they sold more than bought— Philippine stocks worth $300 million, based on Nomura’s estimates. Figures however were worse in South Korea (-$3.1 billion), Taiwan (-$1.8 billion) and Thailand (-$1.1 billion).

As for government bonds, worst performers were South Korea and India, where foreign investors were net sellers amounting to $2.5 billion and $2.7 billion, respectively. June data for the Philippines were not available, but in May, foreigners were net sellers of $400 million.

“We were correct in singling out India and Indonesia as among the most vulnerable..., but we underestimated the unwind of large positions in countries like Malaysia, Thailand and the Philippines,” Subbaraman said.

However, the economist said the financial market correction is “close to over,” thanks to Asia’s sound macroeconomic fundamentals which should support the rebound. The region, he said, remains “fairly strong.”

Inflation remains contained in most countries, where  a “warchest” of foreign exchange reserves exist, while fiscal policies continue to be in good shape, allowing governments to provide stimulus, if needed, “to buttress growth.”

In addition, a recovery in the advanced economies, such as what perceived now, will offset a slowdown in China, the world’s second biggest economy and the largest trading partner of the rest of the world.

A Japan rebound would also bode well, Subbaraman said.

“The investor preference would be not simply for fast growth, but rather those countries with the strongest economic fundamentals, those that pursue structural reforms to enhance the supply-side of the economy…,” he  said.

Risks however persist, he said, noting for instance, the still-fragile economic scenario in debt-ridden Europe which could turn away investors from risky assets in Asia.

On the flipside, investors could invest “indiscriminately” in Asia in search for yields once everything becomes clear in the US, causing long credit booms to turn into bust.

“The danger we see, in the absence of market discipline, is that policymakers are too slow to normalize their accommodative policies. This would see them falling into the same trap the US Fed fell into in the lead up to the global financial crisis,” Subbaraman said.