Asia - Weekly Strategy

By Guneet Singh Sahni
Asian Equity Markets:

Asian markets fell last week on weak demand and negative global cues.

The outlook for the U.S. economy and domestic corporate earnings continue to drive Asian economies. Thus, Asian markets ended the week in the red, taking cues from a disappointing American second quarter rate of growth, rising unemployment and sluggish domestic corporate demand. India's BSE Sensex outperformed the rest of the region, climbing for a fourth consecutive week on the back of the approval of the Indian-U.S. nuclear deal by the International Atomic Energy Agency (IAEA).

Japan

Japan's Nikkei 225 Index tumbled 1.8% to hit a two-week closing low of 13,095, on the back of lower than expected earnings from financials, technology and automobiles sector companies. Dwindling domestic demand and increasing lending fees led to a decline in earnings for Japan's largest banks including Aozora Bank Ltd (TYO: 8304), Shinsei Bank Ltd (TYO: 8303) and Sumitomo Trust & Banking Co (TYO: 8403). The Nikkei's fall was further fueled by a weak earnings report from Japan's biggest personal-computer maker NEC Corp (TYO: 6701, Nasdaq: NIPNF.PK) and a reduced sales projection at Toyota Motor Corp (NYSE:TM).

The Japanese Prime Minister appointed Ibuki as his new Finance Minister and Yosano as the new Economic Minister. We expect the two appointees are seen as aid to help win the popular vote in next year's elections. With Japan's wholesale prices at a 27-year high, on surging oil and commodity prices, Yosano has supported a high interest rate regime. On the other hand, the Bank of Japan is faced with the risk of a recession, and will now come under pressure from the new Economic Minister for a rate hike from the current 0.5%. The newly inducted ministers are also in favor of raising taxes to achieve the government's goal of balancing the budget of the world's largest public debt holder by 2011.

China

Unlike Japanese policy makers' inflation focus, China's President Hu Jintao made a U-turn and announced that sustaining rapid growth will be his government's utmost priority. As a result China's CSI 300 Index rebounded on the last day of the week. Hu Jintao's statement contrasted with his earlier comments, in which he had stressed the need to bring inflation down. Taking steps in this direction, the central bank authorized banks to increase their lending by 5%. This is expected to release approximately $30 billion of fresh credit in the economy. The government also increased tax rebates for exporters of textiles and garments. This step will benefit the Textile Industry, which is suffering from weak external demand, rising costs and an appreciating yuan.

The Hang Seng ended flat for the week, gaining 0.5%, or 122 points, while the CSI 300 Index slipped 3.3%, or 98 points.

India

India's BSE Sensex outperformed its Asian peers, registering a fourth consecutive weekly gain of 2.7%, or 382 points. The Indian Capital Goods sector rallied the most, on the back of the approval of the International Atomic Energy Agency (IAEA) for India's nuclear plan.

We reported the news last week in our report, "India Equity Market Briefing..." Earlier in the week India's central bank raised the Repo rate by 25 basis points, to 9%, and increased the CRR rate by 50 basis points, to 9%. Consequently, there was a steep fall in interest rate sensitive sectors like banking and auto stocks on Wednesday. India's WPI inflation increased to 11.98%, against the consensus estimate for 12.04%.

Singapore's Straits Times Index shed 0.6%, or 16.84 points for the week, led by weaker earnings from property stocks.

Outlook

With earnings season in its last leg, the outlook for the Asian markets hangs on global cues, including oil prices and U.S. economic data. External demand for U.S. goods has shown signs of weakness in this quarter's earnings results. Additionally, high energy and food prices continue to put pressure on overall inflation. Consequently, stagflation fears will put pressure on the central banks of Asian governments to choose between growth and inflation.

Article interests AMEX: DIA, AMEX: SPY, AMEX: DOG, AMEX: SDS, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX, Nasdaq: ASIA, Nasdaq: PRASX, AMEX: PUA, AMEX: NWD, Nasdaq: MEAFX, Nasdaq: EBASX, Nasdaq: EVASX, Nasdaq: MACSX, Nasdaq: MATFX, AMEX: CZJ. Please see our disclosure and Guneet's at the Wall Street Greek website.