Asian stocks tumble as players cash out

PUBLISHED : Tuesday, 25 April, 2006, 12:00am
UPDATED : Tuesday, 25 April, 2006, 12:00am

High energy costs and rising regional units give excuse for profit taking

Stock markets fell across much of Asia yesterday as high energy costs and a surge among regional currencies against the US dollar gave investors an excuse to take profits after the recent rally.

Japan's Nikkei-225 Index had its biggest drop in three months, losing 2.8 per cent to 16,914.4, while the Korea Composite Index and Hong Kong's Hang Seng indices had their biggest falls in a month.

Oil prices remained near record highs of more than US$75 a barrel, raising production costs for factories in Asia. Those factories are also facing pressure from central bankers in developed countries, including the US and European Union members, who want Asian governments to raise the value of their currencies against the greenback to stem their cheap exports.

Allowing Asian currencies to rise would boost prices for the region's exports, thereby reducing demand in the industrialised countries and encourage Asian economies to focus more on domestic consumption, which is a more sustainable growth engine than exports in the long run, according to the members of the Group of Seven bloc of developed countries. Investors, however, predict that the transition could be painful.

'Stronger currencies and domestic economies will have to unfold in Asia. They're part and parcel for the way forward,' said Bill Belchere, chief economist for Asia at Macquarie Securities. 'But structurally, there's an issue: can the economies handle it? Can they really shift gears this quickly?'

An economy fuelled by domestic demand requires strong financial infrastructure such as banking systems, capital markets and competitive service sectors - areas in which many developing Asian economies are lacking.

The G7 members last weekend called on Asia to allow its currencies to appreciate, with the US raising the loudest cry of protest as a flood of cheap Chinese imports has left the US with a huge trade deficit.

The yen hit a three-month high against the dollar, while the Korean won, Indonesian rupiah and Taiwan dollar also jumped. The yuan - the currency that western bankers most want to see rise - is restricted to a narrow trading band, limiting its movement. A stronger yuan is good for the yen because it would boost Chinese demand for Japanese goods, the G7 said.

While the effects of macro-economic issues discussed in the halls of government may take some time to appear on corporate balance sheets, analysts expect record energy prices to leave their impact soon. The price of oil is 37 per cent higher than it was one year ago.

'When oil was US$50 [a barrel], people predicted that inflation would come back. Now, oil is US$75 and people are making similar predictions. At some point it will happen, but I'm surprised there has been so little filter-through effect so far,' said Eddie Wong, chief Asian strategist at ABN Amro.

A key reason for the continued strength in Asian markets has been the rush of foreign investment chasing higher returns and growth prospects than offered by US or European markets.

'The liquidity situation in emerging markets, not just in Asia, has been very supportive, which is evident in the collapse of the spread between emerging market sovereign debt and US treasuries,' Mr Wong said.