TheEdge
HONG KONG: Concerted action by governments globally to shore up the financial system may have signalled the worst is over for emerging Asia's most battered markets for now, but they are likely to remain volatile given still fragile investor sentiment, a Reuters poll shows.
The poll forecasts gains for South Korean and Indian equities by the end of the year, but it sees little upside for their currencies as weaker trade flows and the countries' respective current account deficits will weigh.
India's benchmark stock index, which has plunged more than 43% so far this year, is poised to recover more than 15% by the end of 2008 from Tuesday's closing level to reach 13,250, according to the poll.
"The valuations are extremely compelling at this point of time," said Rajen Shah, chief investment officer of Angel Broking in Mumbai.
"We see Sensex scaling to 21,000 over three years. Our exports to GDP ratio is relatively lower than countries like China, which implies the global turmoil could impact it less in relative terms," Shah said.
Analysts forecast a 10% gain for South Korea's stock market between Tuesday's close and the end of the year, taking the benchmark Kospi to 1,500 points.
That's well off last year's all-time high of 2,085 points.
Asian equities have picked up this week after European governments pledged bank guarantees and equity stakes in banks at the weekend and the United States followed suit on Tuesday.
While heavy selling in recent weeks offers the chance to scoop up Asian blue chips at reasonable prices, investors will continue to fret about the broader economic impact of the US-led global credit crisis, and a possible global recession, analysts said. "Slower global growth will impact exports across the region," said Patrick Bennett, foreign exchange strategist at Societe Generale in Hong Kong.
The prospect of weakening economic growth next year means there won't be much of a recovery in Asian currencies, if any. The poll forecast the Indian rupee - which hit a record low of 49.3 last week - would be at 47.63 by the end of December. That would be within Tuesday's trading range of 48.09 to 47.59.
The South Korean won, which was trading at 1,233 to the dollar early on Wednesday, is forecast at 1,200 by year-end.
Weakening demand in Western markets for Asian goods is already destroying the idea that Asia can "decouple" from an economic downturn in Europe and the United States. Goldman Sachs this week slashed its forecasts for GDP growth in Asia ex-Japan to 7.6% for this year and 6.7% in 2009, from 7.8% and 7.2% respectively.
While those are growth rates Western nations can only dream of, Asia's financial markets, and fund flows, will be influenced by reduced American and European spending and earning power, analysts say.
Indonesia's large domestic sector offers its economy some protection from a possible global economic slump but it will not be immune. Analysts said their forecasts for Indonesia's equity market had gone out the window as the outlook was too uncertain given the markets large foreign shareholdings and highly volatile foreign fund flows.
"We are concerned that earnings forecasts are way too high, so that raises some concerns," said Tim Rocks, equity strategist at Macquarie in Hong Kong. "Indonesia is not one of our favourite markets." - Reuters
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