Market Outlook: 04-02-08

Robert Hsu, April 02, 2008

Asian stocks rose last week, completing their biggest weekly gain this year. The MSCI Asia-Pacific Index added 4.2% to finish at 141.55, which was the index's largest advance since the week ended November 30, 2007.

But despite these gains this past week, the overall picture for first quarter is not as bright, as global financial woes are starting to take a toll on Asian economies. In the first quarter, MSCI Asia-Pacific Index lost 12%, and Asian stocks experienced the biggest first-quarter decline since 1992.

Now let's take a look particular Asian stock markets that have been underperforming in the pas three months:

Vietnam's market index suffered the biggest decline in Asia. Its benchmark index plunged 44% this quarter -- the biggest drop among 90 global benchmarks tracked by Bloomberg. This is quite a shock, since Vietnam was the best-performing stock market in 2006, up about 150% that year.
Japan's Nikkei 225 Stock Average fell 18%, marking the worst performance in the first quarter since 1990.
Australia's stock market experienced its sharpest quarterly slump since 1987.
India's benchmark had its worst first quarter since the index was created in 1979.
Hong Kong's benchmark stock index completed its biggest quarterly drop in more than six years. The Hang Seng Index declined 18%, marking the largest drop 2001, and the Hang Seng China Enterprises Index, a measure of so-called Mainland Chinese companies listed in Hong Kong, lost 25%.
China's CSI 300 Index had its worst quarter since it was established in April 2005. There was a speculation that the Chinese government will take measures, including cutting the tax on stock trading or applying more stringent criteria for initial public offerings and share placements, to prop up stocks. But before that happens, the market could continue to slide.

But amid this dire stock market performance, there is some hope that the Asian markets will change direction, as China's yuan had the biggest quarterly gain since a dollar peg was scrapped in July 2005. The yuan closed at 7.0120 per dollar in Shanghai, from 7.3041 at the end of last year. It has appreciated 4.2% this year, making it the third-best performer of Asia's 10 most-traded currencies outside Japan. Since July 2005, the currency has gained 18%.

U.S. Treasury Secretary Henry Paulson is visiting Beijing this week, which might help accelerate the currency's advance. I expect the yuan to continue this strong appreciation against the dollar. It could rise to 6.8 versus the dollar by the end of June. That's another 3% appreciation in a quarter. At the airport currency exchange counters, dollar versus the yuan already broke thru 7, trading at 6.95.

A stronger yuan will benefit Chinese consumers, attract foreign investments and help keep inflation under check in China. With a stronger currency, Chinese consumers can buy more things. A stronger yuan will benefit Chinese importers and hurt exporters, since a rising currency hurts export profit margins and price competitiveness. It will also help attract more speculative capital into China.

Although I continue to be bullish on China, there are plenty of profitable opportunities out there in other Asian markets right now. In particular, I am very positive of the potential of the Taiwanese stock market.

Due to the anticipation for political change and now a new president being elected, the Taiwan stock market, the Taiex index, beat the world's biggest stock markets in the first quarter, climbing 0.8% in the quarter. In U.S. dollar terms, the index was up 7.6%, which placed the index among the best of the world's 20 largest stock markets.

The strong performance was due to investors' confidence that the newly-elected Taiwanese president, Ma Yin-jeoh, will help ease Taiwanese travel and investment restrictions with the fast-growing Chinese economy. Better relations with China should encourage investment between the two economies, and, according to investment bank UBS, it could also attract about $50 billion to Taiwan's markets.

To capitalize on this trend, I've recommended two Taiwanese stocks. Both stocks have an attractive price-to-earnings ratio of less than 10 and strong earnings growth. I look for both of these companies to benefit from Taiwan's growing economy, which will be boosted by stronger ties with China. Do you want to know the names of these companies? Become an Asia Edge member today!

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