Thus far the month of February has been very negative to stock markets globally in particular Asian bourses with issuing rising from inflation to the middle east unrest resulting in spiking of crude oil prices ( further increase the pressure of inflation and hurting economy growth ). The world has been divided into 2 distinct sector with 2 distinct issues. The West vs the East. In the West, economic growth is slowly recovering, little inflation coupling with high unemployment. On the other hand, the East cited as the main driver for global economic growth at the moment do not have any issue with economic growth and some even face overheating issue but they do face high inflation risk which if unable to contain would result in social unrest ( similar cases to middle east ) and that will be damaging to the economy eventually.
The current middle east unrest resulting in a oil crisis ( oil production country Libya cutting/shutting down supply ) can have 2 different impacts to the 2 distinct regions.
Firstly, the West, with slow economy growth, high unemployment and if the oil crisis creates inflation and that will result in the West economy going into a stagflation stage. Stagflation is even worse then recession as Central banks could not toy with interest rate to spur growth and at the same time let inflation runs wild. Next, the East, the worse case with the oil crisis will result in recession and with Asian tipped to be the main driver for economic growth, a recession to Asian will eventually derail the global economy.
As the middle east unrest still currently happening and yet to have any sign of fully resolve, the impact of it still a question mark to the global economy as a whole. Nevertheless, still need to be cautious of the development over there.
Global markets have been correcting due to the middle east unrest and with funds pulling out of emerging markets ( Asian mainly ), Asian bourses so far have been the hardest hit in the month of February. However, China market was relatively unhurt by the recent correction. This is something worth looking into, the underlying of why it is so.
Oil crisis will affect globally and China will be of no exception. China presently is facing high inflation risk with Chinese Government determine to put in more aggressive cooling measures to tame it with interest rate and banks' reserve hike, should face even more inflation risk with the rising oil price. However, the behavior of the China stock market does not seem to be in sync with the events. China stock market has been on an uptrend ( reversing a downtrend some 6 months ago ) since re-opened after CNY. Normally, stock market is coupled with the nation economy and served as a forwards indicator for the nation economy ( a looking ahead of 6 to 9 months periods ) and for China stock market to defy the normal trend of other regional markets, this could spell something about the China economy 6 to 9 months later ( presumably to the better to be in line with an uptrend stock market ).
6 months ago China stock market was on a downtrend while other regional Asian bourses were on an uptrend with reason being China is facing fast rising inflation and Chinese Government will be dishing out aggressive measures to curb the inflation. 6 months later, the inflation figure indeed showed China inflation is on the high side and exceeded Government projection. The current China stock market uptrend could signal that 6 to 9 months later, China could bring the rising inflation in control and back to Government projection level and in turn the Government re-focus on economic growth. If that is happening, this should benefit other Asian countries. With that reasoning, other Asian market could potentially doing a bottoming process at the moment and rebound once the middle east unrest get resolved and downgrade to a non-harming level. As such, current correction does provide opportunities to buy into quality blue chips.
Talk of funds flowing out of emerging markets ( namely Asian ) and back to developed markets ( namely US and Europe ) could face with snag. Recent data still showing US economy is recovering slowly with unemployment rate still on the high of at least 9%. US Fed last September rolled out a 6-month bond buying program (QE2) to help spur economy recovery and with the 6-month period coming to an end soon, the result of the QE2 still yet to provide any convincing that it is working ( in particular the unemployment rate ) and hence if QE2 like QE1 failed to work, what is in store for US Fed. Hence, investing in US stock market at present price level pose a higher risk than investing in Asian stock markets now.
As globally waiting to see how the middle east unrest getting resolve, investors should monitor the conflicting signals in global stock markets ( China vs rest of the world stock market trend ) as that could signify something could be happening 6 to 9 months later.
