Year Of Ox May Become Another Bear For Stocks

The Chinese year of the ox that begins this month could turn out to be less like a bull and more like another big bear for Asian stocks.

Even after 2008, when roughly $2 trillion of market value was lost in Asia by one measure, the region still has room for further downside. And again, investors will be fixing their sights on what happens in the far-off financial capitals of the Western world.

Compare that to 12 months ago, when the scale of problems in the U.S. mortgage market was less clear. At the time, economists and stock-pickers were abuzz with theories about how Asian economies and markets could "decouple" from the U.S. in 2008. In the following months, the markets proved them wrong with increasing vindictiveness.

Fan Cheuk-wan, regional head of research at Credit Suisse Group''s private-banking division, was among those who expected an economic decoupling. She thought Asian markets would remain resilient "based on the premise that the U.S. subprime crisis would not deteriorate into a full-blown financial crisis," Ms. Fan said.

But it did, and Asia wasn''t spared the pain. The MSCI Asia-Pacific Index, a widely used index that excludes Japan, fell 52.2%, wiping out about $2 trillion in market capitalization by that metric.

The region was battered by an exodus of cash. In all, global investors withdrew a net $59.9 billion from Asian stock markets in 2008, representing cumulative outflows of about 8% of their total holdings in the region, according to EPFR Global, which tracks asset-allocation data.

In part, panic selling was to blame, as risk-averse Western investors sold off their foreign holdings. But over time, it became clear Asia''s export economy was in for a beating as consumer demand in the West evaporated.

The damage seemed to be distributed indiscriminately across the region. Benchmark indexes in Thailand and Pakistan, two countries rocked by a year of political instability, fell 47.6% and 58.3%, respectively. In Pakistan, the Karachi Stock Exchange imposed a floor on stock prices on Aug. 27, not allowing the index or individual shares to trade below the closing prices that day -- a rule that stayed in place until Dec. 15.

In relatively stable economies such as Japan and Taiwan, where stock markets have been laggards for years, investors were punished just as harshly. Japan''s Nikkei Stock Average of 225 companies fell 42.1%, and Taiwan''s Weighted Index dropped 46.0%. Australia''s S&P/ASX 200 and New Zealand''s NZSX-50, two indexes battered when commodities prices collapsed in the second half of the year, fell 41.3% and 32.8%, respectively.

In mainland China''s domestic stock market, the benchmark Shanghai Composite Index dropped 65.4%, dealing a sharp blow to a market that had been one of the world''s top performers in the previous two years.

Hong Kong''s and Singapore''s stock markets, two of the region''s most liquid, became selling targets for global money managers faced with an unprecedented wave of redemptions and margin calls back home. Real economies in both markets also slid into recession, helping knock down Hong Kong''s benchmark Hang Seng Index 48.3% , and Singapore''s Straits TimesIndex 49.2%.

India''s Bombay Stock Exchange, which enjoyed three consecutive years of increases of more than 40%, saw its 30-stock Sensitive Index, or Sensex, fall 52.4%.

With stock prices having come down so far, many companies look cheap. But things like corporate fundamentals and stock valuations didn''t seem to matter in 2008.

"A lot of stocks looked cheap, but in a crisis like this one, using traditional valuation methods could lose you a lot of money," says Ian Huen of Hong Kong hedge-fund manager Striker Capital. One of its funds finished the year up 6% by making big bets against the market in Hong Kong, Japan and Australia.

Exporters across the region, particularly in the technology sector, were hard hit amid weakening demand for their products, while property developers throughout Asia suffered as prices weakened in once-overheated markets such as China. One surprise hit came from sudden swings in commodity and currency prices, which hammered airlines and infrastructure plays, some of which had big losses from hedging and speculative bets on price movements during times of unprecedented volatility.

Even with all of 2008''s declines, few analysts and strategists think the market has factored in all the potential downside. Forced sales of assets and cutbacks in debt are likely to continue apace in the major economies.

"We''re not out of the woods yet," says Philip Jehle, head of private clients at Swiss bank Lombard Odier Darier Hentsch. Mr. Jehle, based in Hong Kong, is moving his clients'' assets into corporate bonds and physical gold.

Still, a number of analysts believe the second half of 2009 may be a good time to start picking winners. Many Asian companies are better able to weather hard times, having bolstered their balance sheets since the Asian financial crisis of 1997. Banks generally have simpler, more-conservative business models and a relatively limited exposure to the complex derivatives that tripped up U.S. and European banks.

By the second half, strong policy actions by governments around the world will have had enough time to take effect. Tough times also will have given stronger companies a chance to swallow up or elbow out weaker rivals.

"Bankruptcies provide an opportunity for stronger companies to increase their market share and grow even if the total market size remains flat," says Kathryn Matthews, chief investment officer for Fidelity International in the Asia-Pacific region. "There is a lot of cash on the sidelines and once we see a recovery in confidence and increased investor flows, Asia-Pacific markets are likely to benefit."

China''s aggressive stimulus measures, coupled with flexibility to lower interest rates further, make some believe it could be an early turnaround candidate.