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Monday, 5 November 2007

Morgan Stanley sees Asia linked to US recession

Mumbai: The crisis in subprime mortgages in the US is unlikely to affect stock markets in Asia, says Stephen Roach, chairman of Morgan Stanley Asia. However, should the credit crunch affect consumer demand in the US, Asian markets will not remain immune, he warned.

Note of caution: Stephen Roach, chairman of Morgan Stanley Asia.Roach noted that if the US does go into a recession, Asia cannot remain as a lucrative investment option.

“Asia will not be an oasis of prosperity in a softer global demand climate,” he said. “I think there could be a significant correction in emerging market equities that will impact the Indian market.”

Weighing in on the debate about the Asian markets decoupling from the US, Roach pointed out that while Chinese consumption is worth $1 trillion (Rs39.4 trillion) and India has a $700 billion market, they pale in comparison to the US, which is a $9.5 trillion consumer market.
Much of India and China’s exports are dependent on the US. If US consumption falls a couple of percentage points, it’s mathematically impossible for China and India to absorb the shock fully, said Roach. “Watch for the US consumer very very closely,” he warned. “The slowing right now in the US is in the homebuilding activity. It’s a global sector, which does not affect Asian exporters much. The slowing that will be coming over the next year will be in the consumer demand sector, which is America’s most global sector.”

However, Roach acknowledged that the impact will be different in different parts of Asia. “I think the impact will be relatively limited in India (compared with other countries).”

“I do believe the equity market in Asia is poised for an optimistic scenario that is well beyond my optimism,” he said. “I am optimistic on developing Asia, but equity markets in your region don’t believe that any problem outside the region will have an impact. I think that’s wrong. When it becomes evident that Asia slows because of the slowdown in America … your Asia market will correct.”

Roach said he did not favour capital control measures. “I understand the need to use them as a stopgap measure when things get out of hand, but I don’t think that’s the way to really manage international financial policy,” he said.

The former chief economist of Morgan Stanley also pointed out that at present, emerging markets are a magnet for global fund flows. Once global market demand slows, capital flows too will slow, he argued.
Roach is also bearish on crude oil prices.

“There is lot of upward momentum right now, but as soon as it becomes evident that the global economy is turning down, I look for a significant reversal of crude oil prices,” he said. “When the global economy turns down, the demand side of the world oil energy market will be hit with a surprising shortfall and I could see a cyclical reduction in oil prices.”

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