No need to panic over slide in stock markets

Blaming factors such as poor US data or China slowdown doesn't quite wash, but while the mood is down there will be no stampede for the exits

PUBLISHED : Wednesday, 05 February, 2014, 5:37am
UPDATED : Wednesday, 05 February, 2014, 8:35am

The Year of the Horse is off to a skittish start. Yesterday, Hong Kong's benchmark Hang Seng Index slumped by 2.9 per cent, its biggest fall in more than a year.

The Hang Seng wasn't alone. Markets across Asia tumbled, following Monday's 2.3 per cent slide on Wall Street and extending the emerging markets rout of last week.

Once again analysts are talking about a general panic in the markets. This time, however, they are hard put to agree on a clear reason for the sell-off.

It's easy enough to point to possible triggers. The trouble is there are so many candidates, and none is entirely convincing.

Lots of people blamed the weakness of the US stock market on December's dismal job creation figures and January's weak factory orders.

But that doesn't really stack up. Yes, recent US economic releases have been poor, but their weakness is easily explained by America's terrible winter weather, which severely hurt business activity, especially in the construction sector. Most observers expect a rebound as the weather turns milder.

Then there was the US Federal Reserve's decision last week to continue "tapering" its programme of quantitative easing. Tapering foreshadows tighter monetary conditions, runs the proffered explanation, so investors are pulling their money out of emerging markets in expectation of tougher times.

This one is troublesome too. Investors have been anticipating tapering for almost nine months now. In any case, tapering does not mean international liquidity is tightening, only that it is expanding at a slower rate. The Fed is still more than a year away from a genuine tightening of its monetary policy.

Next, analysts point to survey data indicating that China's manufacturing sector slowed in January. A weaker Chinese economy, they fret, will damage global growth, which in recent years China has sustained almost single-handed.

However, it is hardly news that China's economy is slowing, and it should be no surprise that factory production slowed in the run-up to China's extended Lunar New Year holiday.

As for global growth, it's something only a few wonkish types at the World Bank really care about. Investors are interested in growth in individual markets, which is a different thing entirely.

Sure, slower growth in China will dent commodity prices, which will hurt resource exporters. But for much of the rest of the world, including many emerging markets, lower commodity prices would be thoroughly welcome.

No doubt each of these three factors - poor US economic data, tapering, and China's slowdown - is affecting investor sentiment. But if you want more plausible underlying reasons for the recent sell-off, you don't have to look far.

Following the US benchmark S&P 500 Index's uninterrupted 37 per cent climb in little more than a year, US stocks entered 2014 looking distinctly pricey.

On a price-earnings ratio of 17.4 at the beginning of January, the S&P was only a whisker less expensive than in August 2008, immediately before the US market crash. Compare that with Hong Kong's more modest valuation at the beginning of the year of just 10.4 times earnings.

Seen in that light, a healthy correction in the US market looks long overdue. Many other markets, including Hong Kong, are simply playing their usual game of follow-the-leader.

Meanwhile, among emerging economies, some, including Indonesia, India, Turkey and Argentina, are battling domestic inflation following years of heavy capital inflows.

Worse, in several countries the prospect of approaching elections has persuaded investors that policymakers have no stomach for the fight.

That's damaged sentiment among both foreign and domestic investors, and some are pulling money out.

But happily for the Year of the Horse, so far markets are not facing a full-blown stampede. There's no need to panic just yet.

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