US fiscal deal could spell trouble for Asia's investment winners

Jan 03 2013, 12:10 IST
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This year, if U.S. growth stabilises and companies start investing again, money could start trickling out of Asia.  (Reuters) This year, if U.S. growth stabilises and companies start investing again, money could start trickling out of Asia. (Reuters)
SummaryInvestors could start to shift some money out of overpriced or crowded Asian investments.

A resolution to the U.S. fiscal cliff crisis, messy and protracted as it was, provided an immediate boost for financial markets but longer term could spell trouble for some Asian assets that are coming off a stellar 2012.

Investors could start to shift some money out of overpriced or crowded Asian investments in favour of the United States on the view that the fiscal deal manages to avert a U.S. recession and so boosts the prospects for American stocks.

A fall in U.S. equities as funds pulled out some money in the fourth quarter, in contrast to a rally in Asia as funds funnelled money into the region, suggest conditions are ripe for some reversal.

"In the short term, U.S. risk premium will come down now that a deal has been struck and might trigger some reversal of flows from Asia back to the U.S.", said Hong Hao, chief equity strategist at Bank of Communication International Securities.

Analysts do not expect a major reversal of funds, but more of a subtle shift as some money managers rebalance their portfolios by taking profits on Asian positions and moving those funds into prospective bets in the United States.

The S&P 500 fell 1 percent from September through December last year in the build up to the presidential election and the so-called fiscal cliff. Markets had worried

that in the absence of Congressional action, $600 billion in scheduled tax increases and spending plans would tip the world's biggest economy into a recession.

At the same time, Asian markets rallied. Japan's Nikkei rose 17.2 percent and the MSCI Asia Pacific ex-Japan index rose 5.6 percent.

To be sure, the fiscal deal has done nothing to resolve other political showdowns that loom in coming months such as raising the government debt ceiling and more spending cuts.

However, in the 12 months following August 2011's equally chaotic political wrangling over raising the U.S. Borrowing limit during which the country lost its 'AAA' credit rating, the S&P 500 rose 9.5 percent compared with a 14.2 percent drop for Asia ex-Japan markets.

PRICEY

Southeast Asian markets such as Thailand and the Philippines were top performers last year, but a flood of funds has pushed valuations to levels that look less appealing

now on a relative basis.

"There are a lot of great companies in ASEAN. But as a market, the region is looking pretty fairly valued," said Bill Maldonado, who oversees

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