Markets have taken an odd turn recently. Economic data coming out of U.S. has actually been very encouraging. The way you hear some people talk about the unemployment and the situation in the U.S., you would have the impression that the U.S. economy is barely moving along and is just a shade away from tumbling into a recession. However, recent economic data has shown that not only is this not the case, the U.S. economy is actually chugging along quite well!
The housing sector is recovering, with housing prices rising faster in the past year than they have in the past seven years. There were analysts who believed that the U.S. consumer was broke and tapped out, and unable to spend anymore. But consumer confidence as measured by the Conference Board's consumer confidence index rose to 76.2 in May, its highest level in five years. And of course, another leading indicator of the U.S. economy, the U.S. stock market (as represented by the S&P 500 index) has reached yet another time high last week.
All that anguish over the potential U.S. austerity measures, resulting in the automatic tax cuts have not had much of an impact on the recovery of the U.S. economy. In fact, with such positive economic data coming out from the U.S., the U.S. Federal Reserve Chairman Ben Bernake was grilled by the U.S. congress because there is an increasing fear that he has allowed the very loose monetary policy and bond buying to go on for too long.
So, this has resulted in a situation where U.S. is breaking new highs, but Asian markets have taken a step back. This is because U.S. imports a lot from Asia, so the thought that the U.S. Federal Reserve may pull back on its bond buying and loose monetary policy causes a certain amount of worry in Asian markets. The interesting thing is that Asia has pulled back much more so that the U.S. market.
Nevertheless, this sort of situation will not continue indefinitely. Either the U.S. economy continues to recover, with or without the U.S. Federal Reserve easing back of bond buying, or it takes a turn for the worse. If it continues to recover strongly, even the worries here in Asia will eventually subside and markets here will move north again, in correlation to the U.S. market. There is little reason why Asian markets should languish while U.S. markets continue to break new highs. On the other hand, if because of too early a pullback by the Federal Reserve, which results in the U.S. economy having a turn for the worse, then neither can the U.S. market keep on breaking new highs. It must inevitably come back to earth.
So, while Asia hates such a situation, the fact is that the continued rise in Asian markets here will still have to depend to a large extent on the recovery of the U.S. economy. This is also because external risks from other major regions or countries like Europe or Japan has lessened. Europe’s debt crisis is contained but Europe’s economy will stay weak for a long time. Japan’s weak Yen this year has seen its economy gather strength as that has made its exports attractively cheap, and this has in turn boosted the Japan markets into a bull run the likes of which hasn’t been seen in Japan for years. However, currency movement is a very unreliable thing to depend on, and no one knows if this state of continued Yen weakness against all its major trading currencies can continue at all.
So, while the risks from Europe and Japan lessened, they can't really be depended on to grow much. Can the U.S. economy continue to recover and thus help to boost Asia's markets growth? I believe it can. It has been years of painful adjustment for the people living in the U.S. since the global financial crisis, and now, they are picking themselves up again. U.S. companies have taken this few years to shed any excess fat and are now staying lean and profitable. U.S. consumers after having gone into an austerity mode for years are now able and willing to spend more.
This doesn’t mean that our favourite market is the U.S.. In fact, given that both the U.S. and Japan markets have done so tremendously well this year so far (much better than most Asian markets), at this point the upside potential in U.S. and Japan markets is less now. Certainly, a lot of the gains this year has priced in a lot of good news for this two markets already. On the other hand, gains in many Asian markets have been much more subdued this year to date. So, given my optimism that the US economy will continue to recover, there is much more potential in Asian markets to make up for lost ground.
So, while it may seem odd that every now and then, Asian markets seem to be moving in opposite directions to the U.S. market, ultimately, they will shift back into an upward trend once the U.S. economy continues to pick up pace and silence its critics. Perhaps we even need the U.S. Federal Reserve to pull back somewhat, just so that people can see that this recovery is a true one and not based on just the U.S. central bank propping it up. Either way, if economic data from the U.S. continues to be good, then the outlook for Asian markets will remain very much a positive one as well.