MARKET
RAP Sectors decouple, not
markets By R M Cutler
MONTREAL - A relatively broad-based
advance on Asian exchanges is being cut short by
new fears of a developed-world recession.
The original upward movement surprised
investment professionals who had expected
continued weakness on the basis of forecasts of
economic slowdowns in the developed market
economies of Western Europe and North America in
particular. It began in Asia at the end of last
week. Equities in the Japanese markets in
particular advanced 3% on Wednesday, February 13,
due primarily to growth in Japan's GDP.
Manic-depressively, however, they slid back on the
14th and spent the Friday flat.
These
movements, confirmed by the Mumbai-based BSE 30
Sensex, occurred only
secondarily in response to developed-country (in
particular US) economic data. They were driven by
endogenous Asian macro-economic developments. The
2% decline in the Nikkei on Tuesday this week, for
example, was caused by investors locking in
profits from previous days, even as Japan
Government Bonds tracked US treasuries to the
downside.
The Nikkei may be moved by the
Dow Jones averages, and sometimes it can create a
feedback downdraft when esoteric parameters
calculated and tracked by computer buy and sell
programs exceptionally exceed the ranges for which
quantitative analysts have programmed them. But
also the ever-increasing program-driven trading
can create counterintuitive moves.
This
may be why, for example, the New York averages
unaccountably began to drive higher around noon on
Wednesday 20th, about two hours before the release
of the Federal Open Market Committee minutes from
January. It may be one reason why East Asian
markets were buoyed, against expectations, several
days over the past week when foreigners entered
them late in the day to buy futures.
Throughout the week it was energy and raw
materials - oil and metals in particular - that
generally drove most world equity markets higher,
and these sectors continued to rally even as
others, such as financials, began to show signs of
weakness towards the end of the current week.
Specialists who a week ago were saying that they
expected gold to consolidate from $910 down to the
$830 round before moving higher, are ending the
current week expecting it to rise from its present
$940 to over $1,000 before falling. Platinum and
palladium soared.
Oil and gas stocks
across the broad, from exploration and production
to integrated companies, advanced strongly,
seemingly ignoring fears of a recession that would
decrease demand.
Much ink has been spilt
over the question of "decoupling" of Asian from
American equity markets. One view holds that Asian
demand can drive Asian markets in the event of a
US recession. Another view is that if Europe is
less badly hit than America, then Asia can
withstand a US recession because demand for
consumer goods produced in Asia will remain
relatively strong. A third view is that other
economies cannot decouple from trends in the US.
All these views make the error of taking a
national view. Although central banks remain
undeniably influential in their ability to affect
short and medium evolution in national equity
markets, it is economic sectors that drive the
aggregate national equity index averages.
The Australian market, for example, began
to decouple from the American one at the beginning
of the present decade. The trends may be similar,
and the volatility of the Australian All
Ordinaries index may be slightly greater than that
of the Standard & Poor's 500, but it is up
about 80% since the beginning of 2001, while the
S&P 500 is up only just over 20%.
If
the Australian index is adjusted for appreciation
of the Australian dollar over this time, then it
is up 145% over the US market, ie, worth nearly
two and a half times as much. The Canadian market
is also up about 80% since the beginning of 2001
in absolute terms, and the Canadian dollar is up
50% over the US dollar since then, making the
advance of the Toronto-based S&P/TSE Composite
comparable to Australia's in currency-adjusted
terms.
Can it be a coincidence that
Australia and Canada were not only less heavily
tech-laden than the US exchanges but also more
heavily based in the "real economy" of energy and
metals? Can it be a coincidence that, although
financials in both countries have indeed taken
hits with the subprime liquidity crisis,
nevertheless the two countries are much less
dependent upon performance by companies in the
financial sector, as a percentage of aggregate
corporate profits, than is the case in the United
States?
National markets still matter, and
governments can still be more important than their
central banks. Witness, for example, the purchase
by the Chinese state aluminum company Chinalco of
9% of Rio Tinto's listed shares on February 1, a
move intended to prevent the Australian mining
company BHP Billiton from acquiring the Rio Tinto
group in what would have been the second largest
takeover in history. But this is precisely in the
natural resources sector, which rather makes the
point that an integrated view of international
sectors may in some cases supercede and give a
more comprehensive perspective than national
markets all taken together.
R M
Cutlerhttp://www.robertcutler.org is a
Canadian international affairs analyst.
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