ASIA: Markets looking irrational
Updated
Asia's share markets have continued to take a battering as they worried about tighter credit globally - the much feared credit crunch. The sell-off was most pronounced in Tokyo and Hong Kong as panicking investors continued to sell out of shares and headed for safer havens like bonds. Will the rush for the exits cause a self-fulfilling disaster or will stability return before serious damage like a global economic slowdown strikes?
Presenter: Karon Snowdon
Speakers: Macquarie Bank's Senior Economist, Brian Redican; Australia's Central Bank Governor Glen Stevens, Shinichi Ichikawa, Director of Equity Research with Credit Suisse Securities
SNOWDON: Japan's Nikkei Index dropped 5-point-four-per cent - a massive one day loss and one of the biggest in Tokyo in recent years. Shinichi Ichikawa, a Director with Credit Suisse Securities says investors are worried about the Yen's appreciation and the US economy, even though the Japanese economy is fundamentally sound.
ICHIKAWA: I think that the market is really worrying about the past, the yen appreciation, and the second point, the market is also worrying about the US economy. But I think that now the Japanese economic fundamental is firm.
SNOWDON: Stocks in Singapore also plunged more than five per cent, Hong Kong lost six, Shanghai more than 2, India lost 3 per cent in its morning session, South Korea lost 3 per cent on top of almost seven the day before. The Asian, Australian and New Zealand markets are all worried about potential problems looming beyond falling share values. The real concern is about whether the repercussions of tighter credit will inflict slower growth on economies from the US to India. Australia's Central Bank Governor Glen Stevens says he doesn't think so.
STEVENS: Objectively it is extremely unlikely that the sub-prime mortgage exposures could significantlly damage the core banking system in any significant country.
SNOWDON: Perhaps reflecting that assessment Australia's benchmark ASX 200 index dropped less than one per cent on the week's last trading day. Governor Stevens added Australia's strong economy meant he couldn't rule out raising increase official interest rates before the end of the year, and doing the opposite, that is cutting official interest rates in the face of a serious credit crunch is a tool central banks everywhere would consider only as a last resort, says Macquarie Bank's Senior Economist, Brian Redican:
REDICAN: The ultimate resort will be to cut interest rates. That will bring down the cost of financing for even those poor quality companies that have been looked at much more closely now by financial institutions, and again that will unleash a bit more financing activity and instill a bit more confidence in markets and ensure that the economies aren't affected too badly.
SNOWDON: There's some risk in that tactic though isn't it, or that strategy and we've seen it backfire in the past?
REDICAN: Well that's certainly true, back in 1987 and also in 1998 the US Central Bank cut interest rates on both occasions to offset some of the financial market volatility that was in place. However it had to then reverse that interest rate cut over the next couple of years, and that did lead to quite substantial downturns in the real economy when that took place. So I think this time around central banks are far more reluctant to cut interest rates and will be concentrating much more on injecting liquidity into the banking market rather than easing interest rates, that really is a last resort.
SNOWDON: Perhaps looking a bit further out, a big question for Australia and also for Asian economies is whether there's going to be an impact on China's growth?
REDICAN: That is probably the crucial question for businesses in the Asia-Pacific region, and I think fortunately Chinese growth is not very dependent on financing. A lot of the investment that is driving the Chinese economy is actually being funded straight out of company's cash flow rather than recourse to financial markets, be it the equity market or the debt market. And that's one reason why we're reasonably confident that China will continue to grow at a fairly rapid pace.
SNOWDON: So you think there's a bit of a quarantining effect from this turmoil in Asia?
REDICAN: We would expect to see a much more delayed pass-through of any weakness from the US throughout the global economy this time around. The main concern is if the US demand really weakens substantially then the demand for Chinese exports will also be hit at some stage. But I think we're still a fair way off from that happening.
