Economics: Global Fund Flows Heats-Up but will Asian Stock Markets Up or Down?

By Pooky, this blog economics journalist

Price to Earnings Creeping Up:

Well, Asian stock markets have been moving up to the point that the old price to earnings ration (PE) barrier of 18 have been torn to bits and the new number is anywhere from 25 to 35. That seems really expensive fundamentally, but we are talking liquidity flow now and reason does not apply. So what about the Asian stock markets now?

Global Funds Heads into Asia: 

Well, about 30% of funds heading into the Asian markets are hedge funds, about 30% are emerging market funds, and about 40% is inter-Asian funds. So what is going on? Hedge funds, as risky as it is, are mainly from advanced industrealized democracies. Emerging funds, are mostly also high risks appetite funds, that comers from advance countries also. And intra Asian funds, are mostly from savings and sovereign rich countries.

So, apart from having only about 40% of the funds that are somewhat long-term, what does the picture mean to the stock markets.

What is Driving the Funds:

The fundamental question to answer therefore, is how secure is those source of funds and how long will they, thus, head into Asia?

Well, the latest fundamental economic data out of many advance countries, is that the stimulus have started to lose its luster-meaning at many leading economies, the stimulus is pumping funds into the economy, but the economies are not responding as planned.

The result is a flood of funds, that are with a few places to head into. Asia meanwhile, is recovering. The logical question to ask and answer is therefore, what is the risk benefit picture looks like? As the 25 to 35 PE ratio still looks a bit too much, especially when Asia depends on the globe to sustain its recovery.

Well, the dollar is tanking big times, and that is a risk. Leading stock market in advance democracies, are sophisticated where fundamentals rule the scene a great deal, and so the risk from a stock market retrenchment is significant, especially with the recovery hitting the skid roll. All that means a great deal of risk advance countries wise.

Expensive But Recovering:

Mean while, Asia, while looks expensive, at least can still boast a recovery that is on track-even with some long-term risk. And the markets are diverse, diversified and in combination, a massive place that is driven by irrationality. So the downside risk, is not too great really unless everyone starts to dump Asia right away.

The likelihood of that, when there is no other place to put the money is not too significant. And so the overall picture of risk in Asia is low.

Global Risk Profile:

In summary, greater risk in advance markets and lower risks in emerging Asia markets-coupled with the need to put money somewhere with the hope of good return, all spells a continued Asia stock market rally-at least in the medium term. That is untill, the PE breaks the 40 barrier, and that will really start to change the risk profile a great deal.

Because when that happens, investors will start to wonder, “How in hell will Asia do when the rest of the globe, isn’t doing so well?”

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