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Why Asian Stocks Fell on Friday

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Just as European worries brought down the Dow Jones Industrial Average 6.2% last month, now renewed concern regarding China's economy is holding Asian markets hostage. Stocks in Asia fell on Friday, extending their sharpest monthly slump since 2008, amid concerns that the Chinese economic slowdown may be worsening.

Weaker-than-expected data from China
The world's second-largest economy reported weaker than expected manufacturing numbers, with its Purchasing Managers Index (PMI) falling markedly in May. Adding to the slump were disappointing jobs data out of the U.S. and weaker-than-expected first-quarter growth in the world's largest economy.  

The MSCI Asia Pacific Index shed 1% on Friday, extending a dismal May when it sank 10%. The broad-market Asian index is poised for its longest losing streak since June 2011. Taiwan Semiconductor Manufacturing, Honda, and Canon all slipped more than 2%.

Singapore (INDEX: S68.SI) slid 1%. Within the index, the biggest laggards were homebuilders and commodity suppliers who rely heavily on China's market. Meanwhile, the Nikkei 225 index fell 1.3%, closing out its ninth consecutive week of losses, while South Korea's KOSPI Composite Index (INDEX: ^KS11) dropped 0.5%.

In Japan, the persistently strong currency continues to hurt the country's exporters, with the yen at its strongest level in three months versus the greenback. Automakers in particular are feeling the pain, with shares of Nissan, Mazda, and Isuzu down 3%-5%.

Surprisingly though, mainland China and Hong Kong shares rose, with Hong Kong's Hang Seng Index (INDEX: ^HSI  ) gaining 0.3%. The reason?

Investors are hoping the authorities in Beijing will take some action to kick-start the slumping economy. The manufacturing numbers are bad enough to warrant additional government spending to boost growth, the logic goes. In fact, massive government investment is one of the primary ways China has grown in recent years.

The biggest risk to global markets
Despite weaker data from China, the outlook for the eurozone is still the biggest concern for the global economy. The Greek elections, scheduled for June 17, will help decide whether the embattled nation can remain in the eurozone. A Greek exit could threaten the very existence of Europe's monetary union.

Meanwhile, the situation in Spain is looking more and more dire, with Spanish banks in desperate need of a lifeline. Yields on Spanish debt are nearing an alarming 7%, which is the level that prompted bailouts for Greece, Ireland, and Portugal.

To sum it up, the global economy is facing stronger headwinds from its two biggest players: the U.S. and China. But Europe remains the biggest threat, and the world has its ears perked for the latest news out of the continent.

The big picture for investors
While the news out of China and the standoff in Europe might be nerve-racking for some, it's important not to get too worked up over short-term market fluctuations. The ability to stomach the ups and downs of the markets is one of the most admirable traits of a successful investor. If you've picked out high quality companies with strong balance sheets and well-diversified businesses, be confident in holding them for the long-term (especially if you snagged them up when they were cheap).

The most successful stock picks tend to be these types of businesses that grow and blossom over time. If you're looking for a great stock idea, check out our new report, "The Motley Fool's Top Stock for 2012." It's about a company that's revolutionizing commerce in Latin America. The report is totally free, but it won't be around forever, so click here to access your copy.

Fool contributor Arjun Sreekumar does not own shares of any companies listed above. The Motley Fool has a disclosure policy.

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  • Report this Comment On August 20, 2012, at 10:31 PM, MHedgeFundTrader wrote:

    “Oh, how I despise the yen, let me count the ways.” I’m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade, but so far every time I have dipped my toe in the water, it has been chopped off by a samurai sword.

    But now the 200 day moving average has been decisively broken, suggesting that the death of the yen may finally be at hand.

    I was heartened once again this week when friends of mine in Tokyo told me that the loose money crowd at the Bank of Japan was slowly gaining in ascendance. Japanese exporters are getting hammered by the strong yen, accelerating the hollowing out of Japanese manufacturing, further adding to the country’s real unemployment rate. It has become a major political problem for the Noda administration.

    The Mad Hedge Fund Trader

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