Mood Brightens in Asia

The Hang Seng has recouped nearly all of its May-June losses as investors reassess fundamentals.
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BEIJING -- Remember the sudden bust of panic selling that stunned investors in early May and into June? Investors in Asia can take some comfort in knowing there has been a stealth recovery.

The benchmark Hang Seng Index in Hong Kong has now recouped most of its early summer losses. After falling nearly 11% between its mid-May peak and the middle of June, it has now almost pulled even with its starting point of three months ago. Even after Friday's 0.9% drip, which put the Hang Seng at 16,887.50, the index was only 1.5% below its pre-selloff level.

So what's in store for China now? Will the rosier mood hold?Recall that the flight from stocks in Asia was based on fears that rising interest rates around the globe could quash growth and that a corresponding U.S. slowdown might smack export-oriented Asian economies.

On the first point, the mood has gotten a little sunnier as investors have gotten used to the idea of central banks in tightening mode. Within Asia, central banks in Japan, Korea and India have all hiked interest rates over the past couple of months, but catastrophe has not ensued. And after Friday's weaker-than-expected U.S. payrolls report, investors are confident the

Federal Reserve

can take a breather.

All of this helps to explain why the Hong Kong index has been on an upswing.

"Once the dust settles, the portfolio managers start to reassess the situation and become more selective in redeploying their money across markets," says Wang Qing, an economist at Bank of America, who believes Hong Kong deserves to be one of those places. "We, in general, believe many countries in emerging Asia still have strong fundamentals, even though global liquidity is tighter than before."

Wang says that as long as the U.S. economic slowdown is orderly, countries in Asia -- including China -- should be able to manage.

"In China, including Hong Kong, the government has a strong fiscal position. The debt level is low, so if the economy were to slow, especially due to slow external demand, the government could use fiscal policy to support domestic demand," he says. "There could be a delink between the U.S. economic growth and Asia."

But other market watchers are somewhat warier -- even those who agree with the scenario of an American soft landing.

"There are a few big macro sea changes occurring over the course of the third quarter which could well keep markets both volatile and trendless in the next few months," UBS economist Jonathan Anderson writes, adding: The second-quarter U.S. GDP slowdown was a "surprising wake-up call to many."

UBS forecasts a gentle slowdown in the U.S., with GDP growth decelerating to 2.5% over the next four quarters. That should spell good news for Asia. It suggests a tolerably gradual decrease in the American appetite for Asian-made electronics and clothes.

Still, Anderson says it's hard to picture a big rally in Asia when the direction of future Fed moves is still murky and Beijing is in tightening mode, given two hikes in China's reserve requirement ratio in short succession. (Fed fund futures are still pricing in more-than-50% odds of another rate hike in 2006, even if the Fed pauses on Aug. 8.)

"We doubt markets will be able to reach a clear consensus on the direction of the U.S. and Chinese economies during the third quarter," Anderson says. His take: Until there are more economic data to clarify the picture, it wouldn't hurt investors to just take a break from it all. "Suddenly, a nice beach vacation doesn't look that bad after all," he concludes.

On Thursday, Wall Street bid up shares of

Sina

(SINA) - Get Report

after the company

soundly beat expectations in its second-quarter report because of strong ad sales. The stock jumped 13.1% to close at $23.64.

The ads business got a boost from Sina's position as the top-ranked World Cup information provider, with the portal attracting nearly 60 million unique visitors during the games earlier this summer. For the first time in three and a half years, advertising accounted for more than half of sales.

But analysts are split as to whether Sina's attempt to make itself over into an ad-centric site makes it a sensible stock buy. Lehman argues that Sina is a smart play on the fast-growing China Internet media space, saying it could pull in as much as two-thirds of its revenue from ads in 2007.

But Deutsche Bank's William Bao Bean, who has a hold rating on the shares, says the final impact of new mobile-operator regulations remains to be seen. "The full brunt of rules will not hit until the fourth quarter of 2006," he pointed out in a note.

Sina said Thursday that the new policies could reduce revenue by $3 million to $4 million in the third and fourth quarter of 2006. However, the damage could be worse if China Mobile steps up existing efforts to develop its own service-provider business, pitting itself against the likes of Sina, Hurray and KongZhong.