Signs point to bottoming out of Asian markets - Reuters

From healing credit markets to a coming wave of big government stimulus spending, evidence is mounting that the historic 2008 sell-off in Asia may fade into the history books.

Credit markets, which tend to lead equities both up and down, have kept recovering, even as stocks have pulled back at the end of the year. Narrowing spreads on U.S. interest rate swaps are another encouraging sign.

The severe dollar funding shortage for domestic banks in South Korea, one of the major pressure points in Asia, has started to relent just as the won has bounced back, and Seoul stocks have led the rally in regional shares.

Central banks have cut rates as never before, and governments are lining up big spending packages that are expected to start reviving growth sometime next year.

Global investors, who fled Asia in a worldwide retreat from risk set off by the meltdown of the U.S. housing credit market, are coming back.

Data from the fund tracker EPFR Global showed Asian shares outside Japan attracting cash in five straight weeks through last Wednesday, lifting currencies like the won, which hit a two-month high, and the Philippine peso.

"Once recognition of a bottom in global equities spreads and the markets regain their composure, the momentum of the rally in Japan and other Asian equities is likely to build," said Yutaka Yoshino, an equity analyst at Nikko Citigroup in Tokyo.

In another encouraging sign, market volatility has come off its historic peaks, though economists warn that rapidly changing economic conditions mean more stomach-churning market swings for investors.

"Market volatility will decline periodically, but economic uncertainty is higher than ever. Just as volatility remained high for a number of years during the early 1930s, it may take some time to durably decline this time around," said economists at Société Générale.

The market rout this year doused hopes that Asian markets and economies could "decouple" from recession-hit U.S. and European markets. But investors seem willing to bet that Asia, with low debt, high household and public savings and limited exposure to the toxic U.S. mortgage debt at the heart of the current crisis, will ride out the slump better than the rest of the world.

Most Asian governments, especially China, have deeper pockets than their U.S. and European peers and can do more to encourage households to spend more and save less, providing some cushion for the collapse in exports.

Reflecting this optimism, Asia-Pacific shares outside Japan have gained 23 percent since markets hit low points in late November, outpacing the 18 percent rise in the MSCI World index and the U.S. S&P 500.

The gains come against the backdrop of some of the bleakest economic data in decades, and the question is whether markets have already fully accounted for the hit to company earnings from the economic downturn, and the damage to currencies from low interest rates.

To be sure, some analysts are worried that stocks in particular have not fully accounted for the damage to earnings from the dramatic downturn, especially in the final quarter of the year.

"The shock to the system is truly quite frightening," said Tim Rocks, Asia equity strategist at Macquarie Securities in Hong Kong.

Note: For Chinese translation, please visit: http://tanhin.blogspot.com/2008/12/blog-post_30.html