Smart money nibbles at Asian equities

Emerging market funds prove attractive as share prices plummet

By Goh Eng Yeow
14 November 2011

It would take an investor with a strong stomach to put up with the roller-coaster which hit global stock markets last week.

But while worries about Greece and Italy were occupying the newspaper headlines, the smart money was quietly nibbling at Asian equities as their share prices plummeted along with those in the rest of the world.

Data from Citi Investment Research shows that funds investing in emerging markets equities attracted about US$2.1billion (S$2.7 billion) in fresh money last week.

Although this was lower than the US$3.5 billion received in the previous week, the inflow suggested that investors were picking up stocks again, as they overcame the jitters that had kept them sidelined since early August.

The Citi data also showed that, within Asia, funds investing in Hong Kong and China equities stayed as the key winners for a second week, receiving the bulk of the new money, followed by Taiwan.

This is not surprising, considering that China was one of the few bright spots for investors, with a drop in inflation suggesting that the world’s No. 2 economy might have successfully engineered a soft landing.

For the week, the Dow Jones Industrial Average was up 1.41 per cent, propelled by a strong showing on Friday.

Singapore’s benchmark Straits Times Index, however, fell 2.03 per cent, as investors dumped blue-chips such as Noble Group, Wilmar International and Genting Singapore, following their third-quarter results.

Still, the steady trickle of investors back into the market has revived hopes that the much-awaited traditional Santa rally is around the corner.

But in order to get the bulls galloping again, conditions in Europe will have to stabilise.

Last week, global stock markets suffered a seizure as Italian borrowing costs headed past 7 per cent into bailout territory, before enjoying a spectacular rebound on Friday, as yields fell back to 6.5 per cent.

To some investors, the rout suffered by Italian bonds resembled an old-fashioned bank run where panicky depositors rush to take out their money for fear that the bank will fail.

But in this case, the run was on something far bigger - the world’s seventh largest economy to be precise, and that could well have horrendous consequences beyond jittery depositors.

True, Italy may be one of the world’s most heavily indebted countries, owing about €2 trillion (S$3.5 trillion). But that does not mean it is in imminent danger of going bankrupt.

In fact, much of its debt is owned by its citizens, who have an estimated total wealth of €10 trillion and are unlikely to want their country to go into default.

For a bank run to subside, the besieged lender turns to a lender of last resort - usually the country’s central bank - to supply ample cash to meet depositors’ demands and restore faith that their money is in safe hands.

For Italy, the lender of last resort is the European Central Bank and it was the massive purchase of Italian bonds by the ECB that helped to push Italian bond yields down and stabilise the market.

But there is one problem. Market strategists noted that the ECB’s current ad hoc approach makes any relief temporary.

‘The ECB should be committing to unlimited purchases of Italian bonds in order to ward off speculators. Unfortunately, it remains reluctant to do this,’ said Mr Shane Oliver, AMP Capital Investors’ head of investment strategy.

This reluctance may be what is holding back the bulls from breaking into a trot to get the Santa rally going.