September 22, 2011Asian Shares, Currencies Plunge
On a day reminiscent of the worst of the financial crisis in 2008, Asian stocks and currencies went into sharp decline, with the Indonesian stock market plunging nearly 9%, the Australian dollar falling below parity with the U.S. dollar and Hong Kong's Hang Seng index settling at its lowest point since July 2009.
The plunges followed a selloff in the U.S. that was prompted by fears the Federal Reserve's moves Wednesday aren't enough to keep global growth from sinking. Adding to unrest were renewed concerns that China's economic engine is slowing.
Across Asia, stocks added to substantial losses in recent weeks, with Hong Kong's benchmark Hang Seng Index shedding 4.8% to 17911.95. Indonesia, an emerging-market darling, erased all its gains for the year, leaving only two minor stock markets globally in positive territory for the year: New Zealand and Venezuela.
Investors fled India, sending the benchmark Sensex down 4.1% and routing the currency, the rupee, which is at its lowest level versus the dollar since mid 2009. A dollar was buying 49.48 rupees in trading Thursday, up from 47.925 Wednesday. South Korea's Kospi fell 2.9% and Japan's Nikkei Stock Average fell 2.1%.
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The selloff has been building for nearly two months as fears about Europe's financial system began to create an outsize demand for U.S. dollars, which in turn has forced investors to close bets that were funded in dollars for everything from local-currency bonds in Brazil to gold to Korean stocks.
Adding to the turmoil, Chinese construction machinery company Sany Heavy Industry Co. suspended its US$3.3 billion Hong Kong initial public offering on Thursday. Sany's IPO, which had been taking orders from investors for four days already, is the biggest on a roadshow stage in Asia at the moment, and its collapse raises fresh questions about the appetite for fresh offerings.
The situation worsened Thursday as investors felt the Federal Reserve's action Wednesday to purchase more long-dated and housing-oriented bonds, dubbed "Operation Twist," was too timid given the central bank's more dire view of the world. Traders and investors dwelled on seven words in the Fed's statement, that there were "significant downside risks to the economic outlook."
"The market knew that 'twist' was coming, but were hoping for a bit more, especially given the statement that the economy is looking worse," said Khiem Do, a fund manager at Baring Asset Management in Hong Kong, where he oversees $10 billion. Investors are "pouring money into bonds," he said, noting that his firm's total return funds, which aren't benchmarked to a particular index, are "absolutely at the minimum equity exposure. There is plenty of cash in those funds. Plenty of bonds and gold," he said.
Adding to worries that the economic storm clouds are darkening, a measure of China's manufacturing activity fell this month more than expected. The preliminary HSBC China Manufacturing Purchasing Managers Index fell to 49.4 in September from a final reading of 49.9 in August, HSBC Holdings PLC said Thursday. A measure below 50 indicates activity is contracting.
That result sent the Australian dollar, seen as a proxy for emerging-market growth because it's a large supplier of raw materials to China and India, down 1.5% and below parity with the U.S. dollar. Analysts expect the often-volatile Australian currency could drop further, especially if commodity prices continue to fall.
Worries about growth in the U.S. reinforce the latest trade data from Taiwan and South Korea out this week that have pointed to a continued slowdown in demand from the West. That's a troubling sign for the export-oriented economies in the region.
Government officials in Asia raced to calm markets Thursday, but also seemed to contribute to the sense that the situation is dire.
At a hastily called news conference early Thursday morning, Norman Chan, executive director of the Hong Kong Monetary Authority, questioned the efficacy of the Fed's move, while also announcing that new measures to cool the territory's frothy housing market were on the way. That sent real-estate stocks sharply lower.
"As the U.S. housing markets are still extremely weak, and U.S. families debt ratio remains high, it's uncertain how effective the Fed's new measure would be to the U.S. economy," Mr. Chan said.
"No need to panic," Indonesian Coordinating Minister for the Economy Hatta Rajasa told investors. He said the current sharp falls in domestic financial markets and the local currency will be temporary because they have more to do with what is going on outside of Indonesia.
Nevertheless, Indonesian stocks continued their selloff after his comments and had their biggest one-day loss since November 2008, though volume was thin with only $825.8 million dollars changing hands. The drop exacerbated a fall in the currency as foreigners converted proceeds of the stock sales, as well as sales of government bonds, into dollars. A central bank official told Dow Jones Newswires that Bank Indonesia has been buying the government's rupiah-denominated bonds to help support their prices.
Indonesia has been one of the world's best-performing stock markets, nearly quadrupling in value since its financial-crisis low in 2009. Its bond market as well has been the poster child for the flows into emerging-market debt, where investors have been attracted to higher yields and strong economic fundamentals.
That is now reversing. Indonesia government figures show foreigners have sold nearly $2 billion from the $78 billion Indonesian bond market in the past 10 days. Foreigners owned 15% of Indonesia's bonds in early 2010, rising to 36% in August. It now stands at 33%, indicating a major pullback could still await.
An exodus out of a relatively small and illiquid market like Indonesia can mean oversized price drops as everyone sells at the same time.
"It's a small tunnel to get through," said Robert Levitt, founder of Levitt Capital Management, which oversees $500 million in private client assets, with some of that invested in Indonesia. The drop in the rupiah against the dollar is forcing stock investors to quickly liquidate or hedge their positions in other ways, such as shorting commodities or other stock markets that run in tandem with Indonesia's.
"You try to get as flat as you can as quickly as well without putting yourself in the funnel of illiquidity," he said Thursday. "Markets are selling off all over the world and there's a huge dollar squeeze."
He hasn't gotten worried calls from clients yet, but senses that is about to change.
"I've done this 25 years. I know how I feel when they're about to call. It's my stomach that's worse than theirs," he said.
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