After clocking robust gains in the first quarter, Asian equity markets dipped into the red over the trailing three months, as concerns about sovereign default in Europe and faltering growth in the US and China took centre stage.
Between April and June, Japan’s Nikkei slumped 10.9% compared with a first-quarter gain of 19.3%. The Shanghai Composite slipped 1.6% and Hong Kong’s Hang Seng dropped 5.3%. Australia’s S&P/ASX All Ordinaries lost 5.4%. The only market to log gains in the second quarter was India’s BSE Sensex, which edged up 0.2% after advancing 12.6% in the first three months of the year. The Sensex is up 12.8% year to date.
Other markets, too, held some gains on a year-to-date basis, despite the lacklustre second quarter. The Nikkei gained 6.5%, the Hang Seng is up 5.4%, while the S&P/ASX All Ordinaries added nearly 1% over the first six months of 2012.
Weak Macros
The flow of economic data during the second quarter was mostly dismal, giving investors plenty of reason to turn skittish.
Fears of a potential hard landing of the Chinese economy mounted after the world's second-largest economy posted growth of 8.1% in the first quarter of the year, below the 8.9% growth logged in the previous quarter. It marked the weakest pace of economic growth in almost three years and also the fifth consecutive quarter of slowing growth in China.
The World Bank lowered its 2012 growth forecast for China to 8.2% from an earlier estimate of 8.4%, citing sharp deceleration in investment growth, softening consumption growth and weak global demand.
Industrial production data further dented confidence. After growing at 11.9% in March, industrial output increased by a dismal 9.3% in April--its slowest pace since 2009--and 9.6% in May.
The story was more or less similar elsewhere in the region. Sharp contraction in Indian industrial production and disappointing first-quarter GDP growth were particularly worrisome, although the Australian and Japanese economies posted some encouraging figures.
But investors also feared that the recovery in the world's largest economy may be stalling after US GDP grew at a lacklustre rate of 1.9% in the first quarter, down from 3% in the previous quarter. Industrial output declined 0.1% in June after a revised 1% gain in April, while job growth slowed for four straight months from February to May and the unemployment rate remains stuck at stubbornly high levels.
Stimulus Hopes
Against this backdrop, global policymakers voiced, almost in unison, the need to push fiscal measures to spur growth in the global economy.
The Chinese premier pledged to focus on prudent monetary and fiscal policies to put the economy back on track and announced a spate of measures to spur consumption within the economy. In the US, Fed Reserve Vice Chairman Janet Yellen said there was "scope for further policy accommodation" as the US economy remained "vulnerable to setbacks." Atlanta Fed President Dennis Lockhart too expressed his support for further monetary actions to aid economic recovery.
Markets responded positively to these developments, but gains were short-lived as the measures announced failed to meet expectations and eurozone worries again came to the fore.
Europe Jitters
For the best part of the second quarter, market moves were dictated by events in the debt-mired European continent.
Electoral drama in Greece was closely watched as the fate of the 17-member common currency bloc hinged on whether Athens would abide by the austerity measures it committed to in exchange for bailout funds. In France, former-President Nicolas Sarkozy lost out to socialist candidate Francois Hollande, a staunch opponent of the austerity programme.
Meanwhile, Spain and Cyprus were the latest joiners to the region's casualty list. The countries became the fourth and fifth respective nations, after Ireland, Portugal and Greece, to seek financial aid from the EU.
Bond yields in Spain zoomed to euro-era highs as investors feared the new eurozone assistance would add to the country's public debt load. Bond yields also surged in Italy where the unemployment rate hit a multiyear high in March.
Weak economic data added to the woes, deepening pessimism about Europe's economy, even as policymakers scrambled to find ways to prevent the sovereign debt crisis from spreading.
Finally on June 29, after two days of heated discussions, European leaders produced some measures to spur growth and stabilise the markets. Policymakers agreed upon proposals to establish a single supervisory mechanism for the eurozone banks and measures to bring down borrowing costs in Spain and Italy.
Leaders also approved a EUR 120 billion deal for infrastructure investments, including a capital boost for the European Investment Bank.
That brought about a happy end to a gloomy quarter as markets soared in the wake of the EU summit outcome.
Reduced Risk Appetite
Barring the latest EU summit, there was nothing much to cheer about in the second quarter as a barrage of downbeat news kept pouring in, hammering risk appetite and sending investors into sell-off mode.
Outside of equities, commodities too felt the pressure mounting as investors cut exposure to riskier assets in search of safer avenues. Crude oil dropped close to 20% during the three months from April to June, while Brent crude was also down around 22% during the period, its worst quarterly performance since the financial crisis of 2008. Copper prices fell 9% for the quarter, the most since the third quarter of 2011. Even gold, which is traditionally regarded as a safe haven during times of uncertainty, lost 4.4% during the period.
Sector Performance
The energy segment was the worst performer in the Asian region, down 17.3%, in line with the losses in energy prices, followed by resources stocks and industrials, which slid 15.8% and 11.4%, respectively.
Both the energy and materials sectors were down about 8% on a year-to-date basis at the end of the second quarter.
Japanese oil explorers Inpex Corp. and Japan Petroleum lost around 23% each, while China Shenua Energy dropped 20% in the quarter.
China's second-largest oil & gas producer Sinopec erased 11.8%, even as the largest offshore oil driller CNOOC logged a more modest 6.1% loss.
Among metal-linked players, Anglo-Australian mining giant BHP Billiton (BHP) lost 10.3% over the period of three months amid growing concerns about a slowdown in China and the US.
Australian gold miner Newcrest Mining and its Hong Kong-listed counterpart Zijin Mining retreated 25.2% and 15.2%, respectively.
The consumer discretionary sector also posted sharp losses of 10.7%, while the technology segment dropped 13.8%.
Global fashion retailer Esprit Holdings tumbled 37.4% as eurozone problems aggravated while blue-chip exporters languished in Tokyo.
Shares of Sony Corp. fell below 1,000 yen for the first time since 1980 and were down 35.7% for the three months ending June 30.
On a concluding note, there could be more bumps to overcome in the near term as investors await what is likely to be a long, drawn out resolution to the eurozone crisis and a hoped-for recovery at the global level. Until then, markets are likely to continue their recent gyrations.
