Many investors are probably feeling uneasy about their equity portfolios this summer amid fears of another global recession that had caused the US and European markets to decline for more than a week. In Taiwan, the TAIEX ended last week with a fall of 9.15 percent, on the heels of a 1.38 percent decline the previous week. Moreover, the benchmark index’s 5.58 percent drop on Friday was the biggest one-day fall since Nov. 7, 2008, and its closing at 7,853.13 points was the lowest in nearly 11 months.
Hoping to rebuild investors’ confidence, government officials on Friday said that the nation’s economic fundamentals remain strong and the local stock market is more attractive than its neighboring bourses. However, sluggishness in global stock markets has rekindled investors’ worries about the economic outlook and the market sentiment is likely to stay weak in the coming sessions after the TAIEX fell below the psychologically important level of 8,000.
Council for Economic Planning and Development (CEPD) Minister Christina Liu’s (劉憶如) remarks about the rattled market and her confidence in the economy is typical of government officials’ knee-jerk reactions to this type of news. She said the reaction of Taiwanese investors to Wall Street’s dive on Thursday was overcooked. She also said that as economies in Asia are now much stronger than they were in the 2008 to 2009 period, even if the US and eurozone encounter a double-dip recession in the near term, Asia should be able to weather the global economic crisis better than during the 2008 financial tsunami.
However, fears about debt problems in some European countries as well as the worries about the slowing US economy and its fiscal woes are not the whole story. The big question is how the government would react if the US engages in another round of Treasury bond-buying — known as quantitative easing, or QE3 in this case — no matter how controversial the QE2 program proved to be.
On Thursday, Hu Sheng-cheng (胡勝正), a research fellow at Academia Sinica and a former CEPD minister, told an economic forum he expected that the US Federal Reserve would restart some sort of quantitative easing measures to deal with the country’s economic weakness.
So, if the current exit of speculative capital from emerging markets because of foreign investors’ capital demand in their home markets proves temporary and if the Fed decides to go ahead with a QE3 program in light of more disappointing economic data, speculative capital will likely return to emerging markets.
This potential influx of speculative capital would again ensure that emerging markets become awash with excessive liquidity and could indirectly lead to unwanted problems such as potential asset bubbles, inflationary pressures and currency appreciation.
That will leave central banks in emerging markets with no choice but to adopt aggressive tightening measures to curb bank lending — a move that many believe would have a negative impact on equity markets and would not be beneficial for business investment. They could also take a more drastic capital-control action and intervene in foreign exchange markets, which may lead to a currency war and discourage the flow of foreign investment into emerging economies if currency markets become too volatile.
Of course, the idea of more quantitative easing by the Fed is just one concern for now and the Fed meeting on Tuesday may help clear up this matter. However, as recent sell-offs have made the stock market technically unstable, there is little reason to feel optimistic about the local stock market’s prospects in the short term, not to mention the recent worse-than-expected manufacturing output and purchasing manager data. This, together with conservative revenue forecasts from high-tech firms, could also suggest that the chance of a positive outlook for the second half is on the wane.