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Asian markets risk correction: US institute
lg_6273
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19-Jan-2007 20:54     
 
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Asian markets risk correction: US institute
Published January 19, 2007


THE 'Goldilocks' global environment cannot continue indefinitely and asset prices in Asian and other emerging markets are at risk of an eventual sharp correction, the Washington-based Institute of International Finance (IIF) warns in a report released yesterday.



Surging capital flows reflect abundant global financial liquidity, and this pool could shrink as central banks in Europe and Japan continue to tighten monetary conditions.



The warning comes against a background of continuing surges in capital flows to emerging markets, despite sharp price corrections last year.

Total stock and bond investment in these markets, plus bank loans and direct investment in business, reached just under US$502 billion last year - only slightly below the record US$509 billion in 2005 - despite dramatic mid-year falls in many of them, IIF says.

Total flows are expected to ease to US$469 billion this year, with Asia experiencing sharper falls than some other regions, though total flows will still be the third highest on record.

Despite the risk of a slowdown in the US and other advanced economies, investors are 'pricing assets as if the Goldilocks global environment will continue undisturbed', IIF says.

'The seeming lack of concern among (many) investors about the market implications of a possible adverse turn in the world macro-economic outlook is a point of vulnerability. This makes prudent risk management all the more essential.'