Financial markets worldwide are showing signs of stabilising as aggressive policy measures gain traction. However, even if markets reach rock bottom, "the road to recovery will be long and hard". That's according to the Asian Development Bank's inaugural Asia Capital Markets Monitor report.
The report reviews recent developments in emerging Asia's stock, bond, and currency markets and presents the outlook, risks, and policy implications in relation to these developments. The report covers the capital markets of China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Vietnam.
The financial outlook for emerging Asia is less bleak than for other regions, according to the report, with net private capital inflows to the region's capital markets expected to remain positive this year but nevertheless sharply lower than their 2007 peak.
Equity markets across emerging Asia are showing signs of a tentative recovery, as valuation indicators have begun to look attractive, the report notes. Any sustained recovery, however, could be delayed as uncertainty over the severity and length of the global financial crisis and recession weighs down investor sentiment.
Local currency bond issues should expand in 2009, meanwhile, as fiscal policy moves centre stage in the fight against recession and government bond issuance rises to finance fiscal stimulus packages, the report says. Rising bond yields associated with increased government bond issuance may raise funding costs of fiscal stimulus packages.
The report highlights that money markets are central to capital allocation, the efficient distribution of liquidity among financial institutions, and the hedging of short-term risks. They act as an aggregator and clearing house for liquidity and are key to price discovery for financial instruments.
Although the relative underdevelopment of money markets in emerging Asia helped insulate the region from the worst effects of the global financial turmoil, all money markets experienced some degree of dislocation, the report notes.
Building vibrant, resilient money markets in the region will require authorities to ensure market confidence, depth, and liquidity, while consistently updating the supervisory and regulatory environment. Despite the diversity among emerging Asian markets, there is a common architecture that can enhance the development of money markets, according to the report. That is: a transparent and robust legal and regulatory framework; prudent regulation and effective risk management practices; continued liberalisation of domestic financial markets; and better cross-border collaboration.