Fresh plunge on global markets
Updated
The Australian stock market is opening and big falls are expected, echoing the earlier turmoil in Asia, Europe and the United States. Wall Street closed its first day's trade since last week's approval of a multi-billion dollar market bail out more than 3.5 per cent down. As we heard in the news, the US president, Geroge W. Bush, says it's simply going to take time to restore confidence. In Europe, governments scrambled to put together a coordinated response to the ricocheting crisis, as the financial system there came under intense pressure, while investors in Asia dumped shares en masse, Tokyo ending the day's trade at a four year low, and Jakarta 10 per cent down.
Presenter: Tom Fayle
Speaker: Richard Martin, chief economist, IMA Asia Economic Consultancy
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MARTIN: Boy what an awful way to start the week.
FAYLE: Yeah now Mr Bush says it's going to take time to restore confidence but time seems in short supply too?
MARTIN: Yes but the point we're at right now is flight from risk and that's probably going to dominate the markets all this week and next week, not just the stock markets, which you've mentioned, currencies are very volatile right now. Japan's yen is about the only strong currency out there as the carry trade winds back Japanese investors pull their money out. The Yen goes up, it's going up on the US dollar, on the Euro, jumped 10 per cent yesterday on the A-dollar, and that's going on. And we're also now finding a hunt in the market for weak countries and weak sectors going on.
FAYLE: Now today's plunge as opposed to previous plunges seems to be a ricochet from Asia and Europe to the United States this time somewhat of a different circumstance?
MARTIN: Yeah contagion again, everyone in Asia lived with that 11 years ago when it started off in Thailand in July 1997, now it's just washing around in the global stock markets. The next step is when does it knock over into the real economies? The areas to watch right now have been first the finance sector; banks, insurance companies, all of that, the second area have been commodities, they've taken a hit because everyone marks down the growth for next year, and then we have to start looking at how will it affect export manufacturing and then look at the domestic economies.
FAYLE: Indeed all the focus over the last 24 hours seems to have been on the financial institutions and banks in Europe, and the response that the governments there have had to put together. Are there real fears that Asia will be next?
MARTIN: Well Asia, everyone is asking this about all the emerging markets; Brazil, Latin America, Africa, Asia. Asia's in a relatively good position, keep in mind this is the region where we're sitting on four trillion dollars in foreign exchange holdings in the region. That brings enormous security to the system. Also banks in the region tend to have better balance sheets that spent the last decade getting rid of the problems that came up with the Asia crisis. So as this washes around the world this week and next week I think by the time that we get into next week we'll find Asia holding up relatively well.
FAYLE: But what's the capacity for the Asian economies to put together a coordinated response if it becomes necessary like the Europeans have done?
MARTIN: Well that's a great, great question, and let me tell you the Asian Central Bank's been working on this for several years. The Changi Accord I think is one of these things, it's an agreement between the central banks to back one another with foreign exchange reserves. Now traditionally foreign exchange reserves are not used to secure a domestic economy, but the amount of money that they're sitting on in foreign exchange reserves in China, Japan, Korea, Taiwan and Singapore it's so vast that they can swing these funds in to help secure the domestic bank sectors and their currencies if they need to. This will be the first test we've seen of this and it'll be interesting to see if the Asian Central Banks call it forward.
FAYLE: Now this is a very, very difficult time for any business people operating. How on earth do they respond to an environment and plan for the next few months when there's so much talk of global recession?
MARTIN: Well unfortunately everyone in Asia knows how this works because it's what happened 11 years ago. The bottom line is cash is king and that is good for the individual company, everyone tries to hold onto the cash they've got, they delay their payables and they chase everyone who owes them money. It's good for individual companies, it's lousy for the market as a whole because of course liquidity in the markets just dries up. So pretty much all financial controllers for corporates across the region are just going to be thinking about how they husband their cash, particularly as going back to the market, going to the banks to get cash is not going to be easy anytime in the next few months.
FAYLE: What about investors in the region, where are they going to put their money these days, apart from gold?
MARTIN: Gold is it Tom, you are right and that's going up and that's because it is very hard to see the connections here. As I said we know the commodities are going to slow down because it's at the slower growth next year. We know the export manufacturing sector is going to slow down. If you're going to look for equities that might do reasonably well they're going to be focussed on the domestic markets in Asia where there's reasonable growth coming through, and also on the areas where government stimulus will help. From Australia down here of course we've got a big infrastructure program they're trying to roll forward. Every country in the region is looking at the same thing; Malaysia's looking at the same thing, Singapore will do it, in Japan if they can get the money they will go forward with a fiscal stimulus focussed on the infrastructure sector. So it's going to be about looking at the domestic sectors in the economies where we're going to see the greatest strength, and that's probably going to be close to government spending.
FAYLE: Alright last week's record plunge was followed by a two-thirds recovery on many of the affected markets. Are we likely to see some brave souls get back into the market later in the week?
MARTIN: We will in some of the stronger economies in Asia. Here in Australia I think the market should come back up a little bit, Singapore should come back up a little bit, but we've also working in a region that is just dominated by risk. Some of the markets will take time to come back and that would be the Philippines classically, one of Asia's high risk markets. India is now in that area as well, it's had a massive withdrawal of foreign investors in the last couple of months, which has knocked the rupee down a little bit, and we're seeing a similar thing play out up in Korea. So we're really going to see a sharp difference between the way the markets perform now in Asia. Those that are classified as traditional risk markets will have a tough time coming back, the money will tend to want to stay in the markets that are well managed, where banks have good balance sheets, where the corporates are regarded as reasonably strong. So quite separate paths are going to be followed by the markets in Asia now.
