The Asian market rally roared on last week as strong corporate earnings and cheap liquidity offset the impact of the Greek debt crisis.
Hong Kong’s Hang Seng Index closed the week up 1.6%, China’s Shanghai Composite 0.1% and India’s Sensex index 0.32%.
Asian markets reversed their mid-week losses – triggered by Standard & Poor’s downgrade of Greek sovereign debt to junk status – as optimism over corporate earnings grew and markets cheered the US Federal Reserve’s decision on Thursday to maintain near-zero interest rates.
Brian Jackson, Hong-Kong based strategist at Royal Bank of Canada, said: “Asian markets were relatively non-correlated with European markets this week as Asian government balance sheets are strong.”
As foreign investors piled into the region, currencies continued their four-month climb – despite central bank interventions – led by gains in the Indonesian rupiah, Malaysian ringgit and the Singapore dollar.
By contrast, European markets plummeted over fears that southern Europe’s sovereign debt burdens will trigger a eurozone slowdown – although the worries eased moderately on Friday amid hopes that Germany would agree to a Greek government bailout next week.
In Asia, markets are banking on the region’s business cycle remaining relatively resilient in the event that the Greek debt crisis intensifies. South Korea announced stronger-than-expected industrial production data, with year-on-year growth picking up from 19.1% to 22.1%, buoyed by a pick up in exports.
Jackson said: “The region could grow 8% this year. Asian banks have little exposure to troubled government debt in the eurozone – so the market confidence that the eurozone sovereign debt problems won’t materially affect Asia is justified.”
Korea’s Financial Supervisory Service said on Wednesday that domestic financial firms have a total $400 million of loans and securities linked to Greece and Portugal, which accounts for 0.76% of the country’s total exposures.
In periods of market distress, emerging Asian markets typically sell off, as investors shun assets that are perceived to be risky and migrate to safe-havens in developed markets. But according to Citi research, the global financial crisis has rewritten the investment proposition for emerging Asia.
The region offers both higher returns and, in many cases, less risk relative to much of the developed world, Citi argued. “Asia may benefit from “reverse” contagion – liquidity inflow into Asia on the back of increasing credit differentiation, which helps explain why Asian assets have been remarkably resilient to the escalating EU woes.”
Emerging Markets Portfolio Research announced this week that emerging-market bond funds had the three best weeks on record this month. About $5 billion flowed into local currency assets, and $4.66 billion into emerging equity funds in last week alone.
But Antoine van Agtmael, chairman of Emerging Markets Management, which oversees up to $14 billion of stocks globally, said the Asian bull market is “vulnerable” in the near term, given high valuations of Asian assets and interest rate hikes.