Asia's view on US lender buyout
Updated
The announcement of the US Treasury buy-out was timed to go through before Asian markets open today. The news is expected to be seen as a positive, at least in the short term, with many Asian banks having bought heavily into Fannie Mae and Freddie Mac securities.
Presenter: Linda LoPresti
Speaker: Arjuna Mahendran, HSBC, Singapore
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MAHENDRAN: Well, I don't think it's going to have a significant impact in terms of a rebound in stock markets across the region. Stock markets are being pummelled by the obvious economic downturn which is now beginning to be felt across Asia. In Singapore, we are seeing the economy contracting at a minus six percent annualised rate, Hong Kong is contracting at about minus two percent, so I think these are early warning signs that even the larger economies, like China and India, and indeed Australia, will face various sorts of head winds going into the second, I would say the fourth quarter of 2008, and indeed early 2009. So I think analysts are bound to keep ratcheting down their earning forecast for companies and that is obviously going to keep impacting the stock markets for at least another three to six months.
LOPRESTI: And what would have been the implications if they had been allowed to go under, given that the confidence in these two firms certainly greases the wheels of credit liquidity around the world?
MAHENDRAN: Yes, I mean if they went under it would have been a catastrophe. I mean this would have basically sucked out whatever remaining liquidity there is in the US mortgage market, and the US housing is basically the largest asset class in the world in terms of its size - $US12 trillion - and if that market just melts down, it will have all sorts of ramifications for financial markets in every corner of the globe. So it is good that they have done this, but there is still a lot more to be done in terms of getting rid of the uncertainty that is currently prevailing across all financial markets.
LOPRESTI: Is there an upside though for the Asian central banks? I mean it's been suggested that they might actually do well out of the buy out. They have sunk huge sums on buying bonds in these two lenders and those will now have the backing of the US Treasury, so this has got to be a positive?
MAHENDRAN: It is a positive, in the sense that Asian central banks who have been funding the US consumer and the US Government by buying treasury bonds and these agency bonds, like what you are speaking about will not see any diminution in those investments in the short term, but longer term I think some of these instruments could still lose value as we go through, once we reach the bottom of this current downturn. Remember, I mean this is basically the bursting of a bubble in a massive asset class of US housing and we still have not seen any bottom to the slide as yet. It all depends on how the market takes the initiatives, but I think there is still a lot more to go, because the unemployment numbers out of the US on Friday were not very heartening, unemployment is now is at 6.1 per cent and analysts are expecting it to go up to seven per cent. So we still have not seen bottom to all this.
LOPRESTI: This announcement has got to be a big boost of confidence though for Asia and in Asia, the US is a big market for Asian exports, would you agree?
MAHENDRAN: It is a big market, it is our biggest customer really for all our Asian producers in one form or another. And the problem is that Asia has been funding this customer by buying their bonds and a lot of Asian investors in the US bond markets are very jittery, because there is really no alternative. They have to keep buying US bonds, but on the other hand, returns from these bonds are diminishing. So this is really the problem, all markets are extremely uncertain, returns are falling and we don't see an end in sight as yet.
LOPRESTI: This announcement seems to have come a bit late for Europe. The fallout from the credit crunch has been blamed at least in part for very tough times ahead in Britain. Does Asia share the same vulnerabilities?
MAHENDRAN: I think so, I think in a sense a lot of the investment by multi-nationals out of the US went into Asia in the last three to five years and a lot of that particularly went into China, Vietnam and countries such as that. And those investments are now going to see a rapid decline in terms of their returns, because obviously capacities are being shrunk, consumers in the US are not buying as much as they used to, and that's going to mean that it's lower profitability and therefore shutdowns for lots of plants that have set up in Asia over the last three to five years. So I think Asia is now beginning to feel the pain and this pain is going to continue right into 2009.
