Schroders expects market volatility to persist

Market falls are providing buying opportunities, even in China where some share prices have dropped by as much as 50%.
While economies and companies in Asia remain fundamentally strong, the volatility that has hurt equity markets in the region will continue to persist, says Louisa Lo, head of equity for Asia ex-Japan at Schroder Investment Management.

The recent broad sell-off in Asian stockmarkets has been based on more of the same news that has been plaguing the region: concerns over US subprime losses, housing and recession, Lo notes. New twists to the same themes include disappointment related to the US bailout package outlined by US President George W Bush last week and concerns over whether interest rate cuts in the US will be enough to help support financial markets.

US share prices have fallen sharply since the start of the year û causing a ripple effect on stockmarkets worldwide û mainly due to growing fears that credit and housing trouble will cause the economy to slip into a recession. A recession in the US is expected to lead to a global economic slowdown because many economies worldwide still rely on the US as their heaviest export market.

ôThe hurdles to restoring investor appetite for risk are higher and anyone waiting for the quick turnaround in markets that we witnessed last summer has been disappointed in recent weeks,ö Lo says.

In an effort to allay fears of a US recession and to help stave off further deterioration in financial markets, the US Federal Reserve has cut its key federal funds target rate by 75bp to 3.5% from 4.25%. That marks the FedÆs biggest interest rate cut since 1984.

Other factors that have hurt the markets include a perceived risk that the subprime issues may still spill into Asian consumption. The concern is that banks will curtail lending or raise lending standards, as banks in the US have done.

ôWe do not believe this is a major risk for consumption growth in Asia,ö says Lo. ôConsumption spending in Asia does not rely to the same degree on credit as it does in the US. In most Asian economies lending is likely to loosen rather than tighten or at the worst remain the same, given the loan-to-deposit ratios.ö

Even if banks do tighten, the impact would be seen in marginal infrastructure spending rather than in consumer spending, she adds.

Lo stresses that the medium- and longer-term positives which support investment in Asia ex-Japan stockmarkets remain in place. Economies are robust: current accounts are in surplus; and government, company and consumer balance sheets are in good health.

ôAsian consumers do not rely on credit to the same extent as in the US, and recent concerns about future growth are unfounded in our view,ö Lo says.

With all that in mind, she notes that ôcurrent market falls are providing opportunitiesö. Schroders' fund managers are finding good value, even in China, where in some cases shares prices have dropped by 50%, she says. ôWe are taking a defensive and selective approach.ö
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