Asian equities may have more bounce (page 1 of 2)

For those investors looking for trends to follow now is as confusing a time as any. The long hoped for stabilization of world markets is proving as elusive a quest as world peace.

In Japan the Nikkei 225 index closed above 9,600 last week compared to its low in late April of 7,600. A nice return if you were perceptive enough to invest in this sluggish market in April. But a pretty poor one if you went in when it was first at this level in the early 1980s! And even with this gain, it should not be forgotten that over three, six and 12 months the Tokyo market is the worst performer among the world's leading stock markets.

On the bond front, Japanese government bond yields have risen sharply; probably on the hope that the authorities are about to implement effective measures against the country's persistent deflation. The coming presidential election in the ruling Liberal Democratic Party due in September is possibly having an effect here.

The winner will also inherit the dubious privilege of taking on Japan's economic problems. It is thought that whoever wins will do so by compromising with the anti-reform forces within the LDP, which may be negative for Japanese shares. Notwithstanding the recent yield increases, Japanese bond yields still remain substantially below those available in America or Europe.

Elsewhere in Asia markets are trading at or close to highs for the year thanks to the global market recovery and the over-reaction to the SARS virus coming under control, as well of course as the virus itself. A rise in dollar terms of almost 21% for the quarter to 17th June in the MSCI AC Far East Free Ex-Japan index is roughly on a par with the MSCI World index over the same period.

The nation which performed most strongly was South Korea with an increase of 33%. Singapore and Taiwan have produced returns in line with the regional average, leaving Hong Kong as the relatively poor relation with 12%.

A recent survey by Merrill Lynch on global fund managers suggests that the rally could have further to run in Asia than in other regions; 72% of managers based in the region said its markets were undervalued. This is a far greater number than any of the world's other main investment regions. Asian fund managers were also upbeat about the corporate outlook. A net 72% of managers said they expected profits to improve in the next 12 months.

One item of news which did contribute to the general optimism was news that China is signing a trade agreement with Hong Kong which helped the region's stock markets.

In the UK the strong performance in the FTSE100 during in April and March leveled off last month, with June's performance almost flat. For the year to date markets have performed in line with how I would expect a recovering market to act with Small Cap funds winning, with an increase of 9.6%, over Medium Cap, at 8.7% and the blue chip sector returning 4.9%

But the continuing volatility of the UK stock market is reflected in the longer term averages, according to Morningstar as measured by their category averages. Over the past three months the UK Equity Large Cap category is up 15.1% but over a year it is down 16.8%.

The Merrill Lynch fund manager survey, mentioned above, found that 79% of UK managers said their own market is overvalued or fairly valued. This was higher than any other main investment region. This seems to reflect the view that valuation levels in the market are reasonable, but gives little indication which way markets will travel over the coming months.

Unexpectedly the Natural Resources Sector Equity category has had a volatile time so far this year, and as usual these funds will be a risky bet for private investors.