Asian Stocks Nose Dive

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Asian stock markets dip amid global economic growth fears

Objective

Analysis of the situation

Asian stock markets responded on concerns about the state of the global economy. Monday witnessed one of the worst sell-offs in recent years.

Japan’s Nikkei 225 index fell 0.9%. So is South Korea, Singapore, Australia, and Taiwan exchanges. Friday saw shares dropped globally, registering a loss of trillions of dollars.

Analysts warned that volatility would continue in coming weeks. Alvin Liew of UOB Bank in Singapore said, “The ratings downgrade has been an unprecedented event.” He said “It has implications as it shows that growth prospects in the US are expected to remain sluggish over the next two to two-and-a-half years.”

Ever since the Standard & Poor’s have reduced the US’s top-notch AAA rating for the first time ever late on Friday, citing concerns about the country’s budget deficits, there has been fear among investors on US economy. The belief is that US economy will move to recession.

Ripples

The drop in Asian stocks was the ripple effect of the dip in European markets. Europe’s main indexes, which include the UK’s FTSE 100 and Germany’s Dax, fell by as much as 4%. However, by the end of trading on Friday, US markets had stabilized and actually closed higher by 0.5%. But this is short lived.

Asia largely relies on export orders from US. ?We are still dependent on demand from the US and Europe,? said Arjuna Mahendran of HSBC Private Bank. He added ?A slowdown in those economies, will see a slump in consumer demand and that takes away a big support pillar for the region’s growth?.

The paranoia continues and investors continued to change their asset holdings on Monday. Crude oil demand came down by almost 3%, while gold, which is less risky, gained in Asian markets. However, analysts see the situation as overdone, and are of the opinion that it is considered as a buying opportunity to purchase fresh stocks.

Even though the turmoil is short lived, as the analysts believe, it has a direct impact on the banks and individuals. It has a direct impact on anyone with a pension or those considering retirement, savers with Individual Savings Accounts (Isas), and on money set aside by families for the cost of children’s university education.

Banks invest a lot of money in the stock market by pension funds. Now the situation would restrict banks to limit their lending for a loan or a mortgage. As for insurance companies, they also invest in the stock market. This will affect the cost of premiums and the products available.

Despite the risks Asia?s outlook was better than that of US and Europe.

Mahendran of HSBC Private Bank said, “There will be a rotation towards buying Asia. Money will flow from developed to emerging markets.”

Reforms

Both governments and policymakers are trying to implement steps to halt the crises, either in unilateral or a coordinated move.
The European Central Bank promised to buy eurozone bonds to gain confidence. The bank did not say which bonds it would buy, but analysts believe it would be from Italy and Spain. The aim is to prove that some of its biggest economies will not default on their debt obligations.

In a separate statement the G7 group members agreed to react in a co-ordinated manner to preserve financial stability. ?If private funds start to sell Treasuries, then central banks will start to buy them,? said HSBC’s Mr Mahendran. ?They have to do this if they are to maintain their competitiveness.?

The Japanese government and central bank first attempted the idea when they stepped into the money markets on Friday in an attempt to weaken the yen and help boost the country’s exports and growth prospects.

US?UAE relationship

US?UAE have a sound economic relationship. Despite this fundamentally sound relationship, UAE will also face pressures in the current economic crisis that are common to all nations.

The present crisis will witness both short- and medium-term stresses for the U.S. and UAE. These stresses include significant contractions in the financial services and real estate sectors, especially in Dubai, falling values of UAE sovereign wealth fund investments in the US, and lower oil prices.

These effects are likely to result in a reduction of investment from the UAE in the US and a reduction in US exports to the UAE. However, it is unlikely to affect the long-term relationship between the two countries given the stable political and commercial environment in the UAE.

Overview

Against the background of eurozone debt crisis and the weak US economy, the volatility on the stocks is likely to continue. It is not clear how long this will go on; however, the financial advisers suggest that small investors sit tight at the moment.

Andrew Gadd, head of research at the independent financial advisers, the Lighthouse Group, said, “People should not be panicked out of the market.” He expects volatility for six months, so investors should ensure their portfolio is diverse.

Sources: BBC, Asian Age, CNBC, usuaebusiness.org

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