The Knee-Jerk Effect

Wow, most of the ASIAN market dropped more than 2% (including Malaysia which is rare by our standard due to low foreign shareholding compare to other regional market) yesterday. The fear factor is fast and furious! The foreign funds usually will sell first ie take profit whenever there is little disruption to their financial modeling.

Yesterday selling was mainly due to the fear that the central banks of other Asian Countries (OAC) will follow China foot step to tighten economic policy which will eventually slow down the aggregate demand. So the million dollar question now is will OAC follow suit? or rather do OAC need to slow down its economy?

Just look at two parameters, GDP growth and Headline inflation. GDP growth tell you whether your country is doing better than before or vice versa. Assuming GDP growth positive, inflation indicates whether the economy has over-speed as a result of fiscal stimuli and easy monetary policies implemented in the past two years. Over loosening of economic policy will give rise to over aggregate demand of goods and services underpinned by low cost of funding.

Overall, the stimulus packages last two years were successful in pulling the region out of recession. with most of the OAC registered positive high teens GDP growth in Q1 2010 due to low base in Q12009. The positive growth has eventually slow down to single digit on declining trend in subsequent quarters in 2010. Further, most of the analyst in town is projecting moderate growth in OAC for 2011. Hence, i really do not see any demand pull inflation is going to be significant.

Comparing with China, it is totally difference story. China continue to register positive GDP growth during Global Financial Crisis in since 2008. Its insatiable appetite for natural resources due to increase in aggregate demand of good and service for local market has been pushing inflation into new high every quarter, hence China official is concerned about the economy is over-speeding. China actions on tightening is policy i thinks is justifiable. but not OAC.

So, any pull back in OAC market will be a good time to enter?

Diverging Trend

Since the last posting in 14 December 2010, Dow has marched ahead added 800 points (7%). Dow has defying strongly against a double top in making when an shooting star appeared on 7 Dec 2010. now what is the market telling us? QE2 is effective? Market is confidence is building up? well i m not convinced.

From Shanghai and Hang Seng perspective, decoupling theory is in played. These markets have moved up a little since Dec 14 and now back to original state as opposed to Dow has advanced 7%. China has been tightening its economic policy with economy overheating in mind. Headline inflation is point up. It is interesting to see that Shanghai completing its symmetrical triangle soon, probably signaling no further tightening in near further future.

Take a closer look at BDI which measure the international shipment activities has just bottom recently. Any significant recovery in BDI may provide an indication that China economy will pick-up again.

I am sure the Big Picture remain unchanged that the global growth will be from Asia in coming years. China being the economic locomotive in Asia, any positive movement in Shanghai, will spill over to other ASEAN economy. So put on your seat belt, sit tight as Shanghai is setting to take off.