Business

Asian stock markets dip on global economic growth fears

Asian stocks have slumped on Monday, extending one of the worst sell-offs in recent years, after Standard and Poor's cut the US's triple-A credit rating.

Japan's main Nikkei 225 index fell 2.2%, while South Korea's Kospi lost 3.8%. Hong Kong's Hang Seng was down 3.5% and Mumbai's Sensex slid 2%.

Investors are worried about the outlook for global growth and debt issues in the US and Europe.

Friday saw trillions of dollars wiped from the value of global markets.

More wobbles?

Analysts warned that markets would remain volatile in coming weeks, despite the G7 group of developed countries and the European Central Bank vowing to support financial stability.

"The ratings downgrade has been an unprecedented event," said Alvin Liew of UOB Bank in Singapore.

"It has implications as it shows that growth prospects in the US are expected to remain sluggish over the next two to two-and-a-half years."

Standard & Poor's cut the US's top-notch AAA rating for the first time ever late on Friday, citing concerns about the size of the country's budget deficits. It has graded the US AA+.

The fear for many investors is that the US economy will slow further, and enter a double-dip recession.

This in turn would hurt Asia, which relies on the US, the world's biggest economy, to buy billions of dollars of exports every month.

"We are still dependent on demand from the US and Europe," said Arjuna Mahendran of HSBC Private Bank.

"A slowdown in those economies, will see a slump in consumer demand and that takes away a big support pillar for the region's growth," he added.

'Knee jerk'

With an increased sense of economic risk, investors continued to make changes to their asset holdings on Monday.

As a result, they sold crude oil, with the main US contract down 3.5%, on concerns demand will slide.

Barclays Capital said in a report that: "A drastic weakening of sentiment has brought oil prices down sharply, with sovereign debt fears key in a mounting loss of faith in economic, and hence demand, prospects."

Gold, meanwhile, hit record highs in Asian trading, nearing $1,700 an ounce, as investors looked to buy assets that offered less risk.

"There are few places you can obviously hide," said Greg Gibbs of RBS in Sydney. "And the ones that you can hide in are doing very well. Gold is the beneficiary because there is no central bank to sell it."

Some analysts said that declines in the stock markets were overdone and many investors would use the slump in share prices as a buying opportunity.

"This is a knee jerk reaction," said HSBC's Mr Mahendran.

He added that despite the risks, Asia's growth outlook was better than that of the US and Europe and investors would eventually have to shift their focus back to the region's markets.

"There will be a rotation towards buying Asia. Money will flow from developed to emerging markets," he explained.

Helping hand

Governments and policymakers have been trying to implement steps to halt the US and European crises, either in unilateral moves or in a co-ordinated fashion.

On Sunday, the European Central Bank said it would buy eurozone bonds, hoping to instil confidence that some of its biggest economies would not default on their debt obligations.

The bank did not say which bonds it would buy but analysts expect them to be from Italy and Spain.

Analysts were mixed in their reaction to the move, and said the Asian stocks slump on growth fearmarkets would be hoping to see more action in Europe.

"Clearly, the S&P downgrade is a very symbolic and historic event," said Paul Sheard of Nomura. "But really the epicentre of this crisis unlike 2008, is very much in the eurozone."

"So I think the markets will be focusing very much on what the euro area policymakers will do over the coming weeks."

In a separate statement the G7 group of developed countries said members were "determined to react in a co-ordinated manner" to preserve financial stability.

This comes after Japan's government and central bank stepped into the money markets on Thursday in an attempt to weaken the yen and help boost the country's exports and growth prospects.

"If private funds start to sell Treasuries, then central banks will start to buy them," said HSBC's Mr Mahendran. "They have to do this if they are to maintain their competitiveness."

While the European and Japanese central banks have already announced measures in a bid to calm markets, Toshio Sumitani of Tokai Tokyo Research Centre said investors are keeping an eye on how the US Federal Reserve reacts to the current turmoil.

"Investors are focusing on whether the Fed may hint at a third round of quantitative easing or other easing measures," he said.

"If it doesn't, investors may signal their disappointment by selling stocks," he added.

Friday problems

The drop in Asian stocks comes after European markets fell on Friday.

Europe's main indexes, including the UK's FTSE 100 and Germany's Dax, dropped by as much as 4%.

This was after the US's Dow Jones index tumbled by more than 500 points - its worst day's trading in over two years on Thursday.

While by the end of trading on Friday, US markets had stabilized and the Dow closed up 0.5% - the Dow still ended the week 5.8% lower.

Analysts warn that any respite may be short-lived.

"We may not be looking at a double dip recession in the US, however, it is also not a zero risk economy," said UOB's Mr Liew.