A Hard Year for Asia’s Markets

The Dow probably will end 2011 slightly up. Asia markets will not show such positive results, though. That suggests the economies in the region may be in for deep trouble next year. This is particularly true if the adage that stock markets look six months ahead is correct.

The Nikkei 225 has taken a particularly bad beating. It is off nearly 20% since the first trading day of last January. Some of the drop can be attributed to the March earthquake, but the Nikkei also has fallen sharply since August. Whether that is due to the value of the yen, or ongoing production interruptions because of both the earthquake and Thailand flood, is hard to say. Nevertheless, the Japanese stock market continues to signal that the first half of 2012 will be difficult financially.

The drop in Hong Kong’s Hang Seng is nearly the same as the drop of the Nikkei. Worries about a so-called hard landing of the Chinese economy likely have caused some of this. Just as important, the property and real estate markets in the region have begun to cool. Both individuals and companies have enough equity invested in this kind of  hard asset that a U.S.-style drop in prices, most of which came from 2006 to 2010, would devastate the Hong Kong economy, and perhaps that of the People’s Republic as well.

The hardest hit of the major indices in the region is the Shanghai Composite. Investors in shares of major mainland companies must believe that China’s huge export machine will slow sharply next year, or that the threat of a collapse in the banking sector may be worse than the government of the People’s Republic will let on.

U.S. markets have begun to turn higher. There is some degree of optimism that the rise in consumer activity in the fourth quarter will carry into next year. The possibility that tax cuts will continue and an extension of unemployment benefits also can be considered a positive factor.

Asian markets, however, have not just dropped recently. The fall has accelerated. The “vote” of global capital market investors, and those who trade locally in the region, is that 2012 will be a poor year.

Douglas A. McIntyre