Strong economic fundamentals should shield Asian economies from the worst of the fallout from the US sub-prime market meltdown but the uncertainty that has rattled investors will persist for some time, analysts said yesterday.
Markets across Asia were trying to steady following Wednesday's steep decline when investors were spooked by the possibility that defaults in the US sub-prime mortgage market might ignite a wider crisis in global debt markets.
"We're still very bullish on Asia, where the growth dynamic is still strong," said Peter Redward, chief economist for Asia at UK lender Barclays. "Asian growth will probably temper some of the effects of the US credit woes."
Investors are weighing the positive impact of solid earnings reports against the chances that mortgage defaults in the US will continue to push up credit costs, crimping future earnings growth as well as corporate activity.
Redward said he does not see any risk of a capital flight away from Asia because corporate balance sheets are strong, current account surpluses are rising, inflation is stable, fiscal positions are robust and monetary policies are expansionary.
"The global growth that created these strong liquidity flows is still there," Redward said.
In Australia, shares in leading investment bank Macquarie suffered their largest ever one-day fall on Wednesday, tumbling 10.7 percent after it revealed that two of its funds faced large losses due to their US exposure.
Macquarie Bank chief executive Allan Moss dismissed the sell-off as an over-reaction, telling a banking forum on Thursday that the bank could steer through a rising interest rate environment.
Moss said credit terms had widened in sub-prime markets in recent months.
"From that there has been a spillover into other credit markets and in my view it's an over-reaction," he said.
Shane Oliver, head of investment strategy at AMP Capital Investors, agreed that the markets were over-reacting but said that response will likely permeate through equities for some time.
"I think we're seeing a classic panic," he said. "My view is this could get worse before it gets better because the sub-prime mortgage problems which are at the core of it have a bit further to go."
In Japan, analysts are betting that a strong economy will mitigate any fallout from the US.
"The direct impact from the US sub-prime lending problem on the market here is considered limited but influenced by the fluctuation of the foreign exchange market when the yen strengthens against the dollar," said Takehide Kiuchi, chief economist at Nomura Securities Financial and Economic Research in Tokyo.
Kiuchi said speculation the Federal Reserve could cut interest rates in an attempt to stabilize credit markets would see the yen strengthen. Such a move would also hurt Japanese exporters and cause anxiety on the bourse.
"It will take one or two months until financial markets return to [being] stable and that will be once the overall US housing market becomes stable or private consumption shows a trend of picking up there," he said.
Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center, believes the Nikkei benchmark index, now hovering around 16,980 points, could suffer a relatively modest slide to between 16,500 and 16,800 points if the sub-prime issue continues to affect global markets.
"Japan's economic fundamentals support the bottom for shares as the Japanese economy has not stalled, nor have corporate earnings deteriorated. But recently financial markets have been influenced by speculative traders' unwinding their positions," he said.
In South Korea, the stock market's record-breaking run was rudely interrupted by the US credit problems.
"Investors are in a panic on fears that they're seeing the beginning of a global financial market meltdown after years of feast supported by low interest and ample liquidity," said Jang Bo-hyeong, economist at the Hana Institute of Finance.
Jang said Seoul faces downside pressure as long as investors remain nervous about the US debt markets.
As in Japan, economic fundamentals are expected to provide a floor for the South Korean market as robust exports and reviving domestic demand serve as powerful growth engines.
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