Reuters

Passers-by look at market display indicators outside the Australian Stock Exchange as the market opens to deep losses Friday.

 

SYDNEY (MarketWatch) — Asian equity markets plunged into deep losses Friday, with some indices tanking more than 4%, but strategists say the outlook for the region remains strong and that the market panic has even created some buying opportunities.

“You have to distinguish between what we’re seeing right now, which is periods of market panic, versus longer-term issues about growth, earnings and valuations,” Russell Investments chief investment strategist for the Asia Pacific Andrew Pease said.

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“Right now markets are asking themselves whether global growth has hit a real roadblock, and whether the U.S. will go into double-dip recession,” said Naomi Fink, equity strategist at Jefferies Japan.

Russell Investments’ Pease said a combination of factors collided to sour global market sentiment.

“A lot of things lined up at the same time to make markets very nervous. The lack of satisfaction over the U.S. debt deal, fears about the softening in the U.S. data, plus fear that the European crisis is inevitably heading towards Italy. You put those things together, and overlay it with concerns that the Chinese economy is slowing anyway, and can see what the logic is behind it,” he said.

In the wake of the financial crisis, Asia decoupled to some extent from the U.S. and Europe, but strategists said that when uncertainty spikes, global bonds strengthen.

“What we typically see during periods of market panic is very high correlations,” Andrew Pease said.

“If the markets worried that the U.S. is about to head into recession, or Italy is about to become huge problem for Europe, then that has a big flow-on for what’s seen as a high-growth part of the world [Asia], the swings are always going to be amplified in that region. That’s what we’re seeing right now,” Pease said.

But despite the sharp selling, Jefferies Japan’s Fink cautioned that concerns about the U.S. may be overblown.

“I don’t think it’s time to panic yet. We saw bad ISM [manufacturing] data, but it’s still in expansion territory, and same with Japan’s PMI. The fear is that we’ll suddenly plummet from expansion to contraction territory,” she said.

“It feels like an overreaction, but people aren’t going to view it as an overreaction until they have a reason to think otherwise,” Fink said, adding that an upside surprise in Friday’s U.S. nonfarm payrolls data could provide that catalyst. Read July non-farm payrolls preview

Pease said that despite current volatility, Asian equities remain attractive on fundamental basis.

“On a fundamental basis, the valuations still look acceptable. The main concerns is still how deep will the China slowdown be. On a fundamental basis, Asia is still a good medium-term bet for a well-diversified portfolio. You want to have some exposure there,” Pease said.

He added that the slump on global markets represents a buying opportunity — particularly across Asia.

“Share-market valuations globally are much more reasonable now than they were heading into the global financial crisis,” Pease said.

“We know that growth drivers are stronger in Asia. Over time, it’s going to be a factor which causes those markets to provide stronger returns, over the medium term,” he said.

“It’s like most episodes: The important thing for investors is not to get panicked by these episodes, and not to react with emotions. There will be opportunities that come out of it,” Pease said.

Virginia Harrison is a MarketWatch reporter based in Sydney.

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