The torpor in Europe is spooking the markets, and there is a global rush to find safe havens. That is probably what is behind the drop in the $A — after all about two fifths of the ASX is foreign ownership — and it is behind what is happening in much of the region. An insight into this is provided by RBS, which is assessing outflows from Asia:
Exit from Asian funds continues; brace for larger outflows: The outflow of capital from Asia ex-Japan funds continued for the seventh straight sessions at US$469m this week. However, given the cut-off date for EPFR Global’s weekly data falls on a Wednesday, clearly, this set of data is not reflective of the current market situation considering the rout seen in global financial markets yesterday. MSCI Asia ex-Japan for instance plunged 5.5% as investors dumped risky assets following the Fed statement, which pointed to significant downside risks to the economic outlook. Further fuelling the flight out of equities is the latest Chinese PMI data, which fell from 49.9 in August to 49.4 in September, a strong sign that even manufacturing activities in China is starting to decelerate.”
Yes, there is a lot of fear about recession in the air:
“On the equity strategy front, we have since four weeks ago been pounding the table advocating investors to de-risk their portfolios. We believe that the risk of a global recession is rising incrementally and that this potential downside has not yet been baked into analysts’ forecasts. In short although regional markets have not been expensive, but they could, however, become cheaper. Right after the release of Asia and recessions dated 29 August 2011, we published Brace for impact dated 13 September 2011, stress testing regional markets and sectors for ‘worst-case” scenarios based on past recessions. Indeed, the speed and velocity of the market sell-down yesterday, particularly in markets such as Indonesia, suggests that the bearish scenarios put forth in our recent notes are coming to the fore.
However, it is more likely than not that the recent market carnage is merely a reversal of gains registered since the time of QE2. More importantly, investors should take precaution against buying into the current weakness based on “forward P/Es” given that analysts in general are behind the curve in their numbers, especially during major market turns like this. Hence, as analysts incrementally trim their forecasts, the “forward P/Es” may not look cheap despite the recent pullback in share prices as forecasted earnings also fall in tandem. Hence, we expect funds outflow to accelerate over the next few weeks as investors par their exposure to Asia or anything risky in general. Do note that the 5.5% drop in regional markets yesterday is the highest since early November 2008 and this underscores the magnitude of the current risk aversion. On a year-to-date basis, US$10.2bn has exited from regional markets but this only constitutes half of the inflows seen in 2010. More crucially, the bulk of the recent outflows were accounted for by the non-ETF long-term investors. Over the past seven consecutive weeks of net outflows, non-ETF funds accounted for 59%, which is higher than their 53% share of inflows in 2010. This suggests that the long-term investors are pulling funds out at a greater urgency compared to their enthusiasm in allocating funds to the region back in 2010.”
This must also apply to the ASX.