Economist says Market turbulence ‘overdone’

The US-epicentered global financial market turbulence that sent shockwaves to local and regional markets in the last few days is “overdone” as the underlying economic outlook for the world remains “fairly robust,” a top economist from HSBC said.

Hong Kong-based Frederic Neumann, managing director and cohead of Asian economic research at HSBC, said in a press chat on Friday that the world was still in the midst of a synchronized global recovery, with Europe, the United States and China showing strong numbers.

“What’s interesting for us is really nothing has changed with regard to the underlying economic outlook for the world. So it seems to us that some of this volatility may be overdone. This is more a market correction than it is something that signifies a risk of recession,” Neumann said.

In the Philippines, the local stock barometer last week wiped out all gains so far this year on increased global risk aversion triggered by US inflation jitters. The Philippine Stock Exchange index (PSEi) shed a total of 307.06 points or 3.5 percent last week, its worst so far this year.

“We should also keep in mind that when you look at market volatility in the last week or so, this comes after a very sharp appreciation and market rallies. So there’s a little bit of indigestion in financial markets after markets have gone up very quick. Now there’s a correction but we don’t think the underlying fundamentals really have been too affected by this,” Neumann said.

The recent market behavior has been widely attributed to US inflation jitters. If the US Federal Reserve (Fed) raises interest rates earlier than expected—as central banks tend to do when consumer price pressures are escalating—this will have a spillover effect on Asia.

With the exception of the Philippines, Neumann noted that many Asian economies had increased their debt stock in the last 10 years or so, making the region more sensitive to interest rate pressures. As such, he said it could be a headwind for growth in Asia if the Fed would raise interest rates too quickly.

“But our view is that inflation worries in the US is overdone, that US Fed will continue to raise rates very gradually, that the recent volatility is just a short-term correction,” Neumann said.

HSBC’s house view is that the US Fed will raise interest rates twice this year.

The economist said the outlook for US interest rates remained benign because US wage growth remained subdued while the very accommodative monetary policy of other major central banks like the European Central Bank and the Bank of Japan would temper the impact of Fed interest rate increases this year.

HSBC also expects long-term interest rates in the United States to decline again and is seen to ease the pressure on Asia and lead to market stabilization.

Another offsetting factor is the likely weakening of the US dollar against Asian currencies this year.

“That’s important as well when trying to assess risks because a weak dollar insulates the region from rising US interest rates,” Neumann said.