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... but are resuming there slide downward. I have attached a (dated) spreadsheet that decomposes the US publicly traded Asian ETFs that may be of interest to those who want exposure to this sector but don't want to go through the trouble of individual stock. The sheet breaks down sector concentrations and top 10 holdings for each fund.


In China, inflation declined from a 12-year high of 8.7% in February 2008 to 4.9% in August. Though inflation has come off highs, it is mainly driven by food prices. The growth in food prices declined to 10.3% y-o-y in August 2008 from 14.4% in July, keeping inflation high. Inflation is likely to decline further as commodity and fuel prices across the globe regress. The caveat is that we see China's growth slowing much faster than the reprieve in inflation. See the China-specific sections of The Butterfly is released!, Global Recession - an economic reality, and my China Macro update accented by media accounts.

  pdf  Asian ETF Spreadsheet (91 kB 2008-11-07 04:23:32)

Japan - Lower export earnings indicate tough times ahead

Japan's dependence on exports has increased its vulnerability to the global financial turmoil. Japanese equity markets were trading at three-year lows. The benchmark Nikkei 225 Index declined 24.3% during the week ended October 10, 2008. The share of exports in GDP growth increased from 9.8% in 2001 to 16.5% in 2007. Japan's GDP grew 1.3% in 2001 and 2.2% in 2007. Economic deterioration in the US and Europe, the main markets for Japanese exports, is decelerating the pace of growth in Japan. Lower demand for goods and services from the US and Europe, constituting 34.4% of total exports in 2007, dented the Japanese economy. Factors such as negative GDP growth in 2Q 08 (3% annualized) and lower export earnings in August 2008 are pushing the economy to the brink of recession. It is worth noting that the US accounted for 21.9% of total Japanese exports during 2003-07. As US growth subsides, demand from the US is likely to decline further. The monthly exports growth to the US declined 21.8% y-o-y in August 2008 from a high of 20.3% y-o-y in September 2006. The sharp decline in export earnings from the US is hurting the Japanese economy severely. Exports to the Euro area (14.6% of total exports in 2007) contracted by 3.5% y-o-y in August 2008 compared to 24.0% in September 2007. As the financial crisis spreads and demand from the US and Europe declines, the Japanese economy would contract even further.



Source: Ministry of Finance


The high dependency on exports has sensitized the Japanese economy to global economic growth. The anticipated decline in the global GDP from 5.0% in 2007 to 3.9% in 2008 is expected to impact Japanese exports. The IMF has estimated global GDP growth at around 3% in 2009. The credit crisis compounded the problems of Japanese companies. To alleviate woes, Bank of Japan signed Dollar-Yen swap agreements worth US$60 billion each with the Federal Reserve Bank of New York on September 18 and 29. The agreements injected fresh capital into the financial system, increasing liquidity.


A stable Japanese Yen is very important for international trade. The recent appreciation of the Yen in relation to the US dollar made exports unfavorable. The Yen had appreciated 9.2% over the average for 2007 until October 19, 2008, and 17.2% from its high on June 22, 2007. It did not appreciate in relation to the Euro, based on the average for 2007 and 2008. However, the Yen appreciated 16.9% from its high on July 18, 2008. The Yen increased sharply due to ongoing turmoil in countries with strong currencies. This translated to huge buying of Yen. The rapid appreciation of the Yen is likely to negatively impact exports and dampen economic growth. An unstable Yen could also hurt global forecasts and hinder Japan's growth.


China and India - The Decoupling theory made for flowerful prose, but the reality is passé

The GDPs of China and India, the leading economies in Asia, grew over 9.0% in 2007. China is an export-driven economy and demand from the US and Europe influences its growth. Exports to the US and the Euro area account for 38% of total Chinese exports-the US alone accounts for 22%. Consequently, any slowdown in demand from these regions would negatively impact growth in China. Though India is largely a domestic demand-driven economy, the global economic recession could severely dent its growth prospects too, either directly or indirectly.


Besides their reliance on the US and Europe, China and India also depend on each other. Chinese and Indian equity markets have been in freefall ever since the global financial crisis intensified. The Dow Jones Industrial Average had declined 32% YTD as of October 16, 2008. In comparison, China's benchmark Shanghai Composite SE index is down 64% YTD, while India's benchmark index, the Sensex, is down 48% YTD. The S&P 500 index is down 31% YTD. Though concurrent, the fall in Chinese and Indian equity markets has been more severe relative to the Dow Jones.  



Source: Bloomberg