Beware market overreaction

Fear that the US Federal Reserve (Fed) will pull back on purchasing federal debt triggered manic selling in Asian markets on Tuesday as several economies in the region saw their currency and stock markets fall by big margins, with the Hong Kong stock market losing 493 points to close at 21,970 for the steepest drop in seven weeks. The capital exodus prompted by worries that the Fed is cutting back debt purchase also gave some pundits a reason to sound the alarm on the prospect of emerging economies.

However, this is not the first time international speculators played the scare tactic to profit from panic selling and certainly will not be their last. The latest fall in Asian markets was apparently another example of overreaction to unsubstantiated hearsay. Given the fact that the leading economies (the US, EU and China) are doing relatively well at the moment, the financial market is in a good place in terms of growth and investors should think twice before falling for such scare tactics.

Huge amounts of cheap capital have flooded emerging markets since leading Western economies led by the US began quantitative easing (QE) to stimulate their own recovery, bringing temporary prosperity as well as growing risk of an asset bubble burst to the developing countries. The Fed is expected to begin reducing debt purchases as early as next month, triggering a mass return of capital back to developed nations that shook emerging economies as well as their financial markets and exchange rates quite violently. Some fortune-tellers went so far as to predict another financial Asian financial storm could be on the way, contributing to the panic-driven market fall in the region, including Hong Kong’s.

It should be noted that several economic indicators showed better than expected results in recent months while the US and European economies continue to stabilize. The mainland economy in particular is improving and gives neighboring economies a good reason to feel confident about their own prospects in the near future. Speculators thrive in market fluctuations and will never stop trying to induce ups and downs for their own benefit. The US cannot afford to abandon QE all of a sudden, which means speculators can reuse the scare tactic as often as they feel like it until its “magic” wears off. Investors here should be on guard against overreaction and losing money in “Fed-fear” games.

This is an excerpted translation of a Wen Wei Po editorial published on Aug 21.