October 10th, 2011
07:57 AM GMT
If Asia is supposed to be where most of the global growth is, why have the markets there been more volatile than their U.S. counterparts recently?
Let's take the 3rd quarter (July-September) and compare.
The Dow was down 12% and the S&P down 14%. By contrast, the Hang Seng plummeted more than 22 %, the Kospi was down more than 16%, while the Nikkei was 11% into negative territory.
Japan and South Korea are major exporters, so they feel the ripple effects of the problems in Europe and the United States.
The Hang Seng Index has its own microcosm of issues that helps to explain why it's been on a more dramatic roller coaster ride. It has several mainland Chinese companies – including China Unicom, CNOOC - listed as "H shares.” This refers to a part of the company floated on the Hong Kong exchange, with the rest listed on mainland Chinese exchanges.
So the Hang Seng is more exposed to the problems China is grappling with, such as inflation and a property bubble. H shares have been underperforming recently.
Yonghao Pu, managing director of UBS Asia Pacific, explains, "The market is concerned about China's hard landing and banking crisis and of course, inflation as well."
China is supposed to release September inflation figures on Friday. Inflation has cooled down from its three-year high in July but it is still hovering at around 6% - above Beijing's target range of around 4%.
As for exposure to the troubles in the West, Pu adds, "Asia is typically a high beta play. If the U.S. fell into a recession and Europe continues with its crisis, the Asian financial markets will suffer more.
“The markets here will not only lose exports but they will also see its funding reduced from European banks, and those banks are already trying to shrink their balance sheets."
Asian investors are watching Germany's Angela Merkel and France's Nicolas Sarcozy try to come up with a precise plan for the Eurozone but there's a hunger for more specifics.
"There's a lack of knowledge (about the plan) and markets don't like not knowing what's going on. So, there's going to be more caution," says Andrew Sullivan, Prinicpal at Piper Jaffray Asia Securities.
For all the talk of decoupling, the economic prospects for China - and Asia in general - are closely tied to the rest of the world.
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