Asian equity markets edge lower on Wednesday, tracking the overnight pullback on Wall Street that snapped an eight-day winning streak. Hong Kong’s Hang Seng Index turned out to be the worst performer, falling 1% for the day amid heavy losses in the e-commerce major JD.com led by the report of Walmart's stake sale.
Adding to this, concerns over slowing growth in China continue to weigh on investors' sentiment and contribute to a decline of around 0.4% in the Shanghai Composite Index, which remains close to a six-month low. Furthermore, Japan's Nikkei 225 is weighed down by the recent appreciation in the Japanese Yen (JPY) and the political uncertainty led by Japanese Prime Minister Fumio Kishida's decision to step down. Meanwhile, Japan’s exports grew less than expected in July, while imports accelerated on improving local demand, with the trade deficit ballooning to ¥621.84 billion.
Meanwhile, US equity futures moved little in Asian trade as traders seem reluctant to place fresh bets following the recent strong rally and ahead of the key event risks. The July FOMC meeting minutes will be published later today, which, along with Federal Reserve (Fed) Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday, will be scrutinized for fresh cues about the policy path. This, in turn, will drive investors' appetite for riskier assets and provide a fresh impetus.
Asia contributes around 70% of global economic growth and hosts several key stock market indices. Among the region’s developed economies, the Japanese Nikkei – which represents 225 companies on the Tokyo stock exchange – and the South Korean Kospi stand out. China has three important indices: the Hong Kong Hang Seng, the Shanghai Composite and the Shenzhen Composite. As a big emerging economy, Indian equities are also catching the attention of investors, who increasingly invest in companies in the Sensex and Nifty indices.
Asia’s main economies are different, and each has specific sectors to pay attention to. Technology companies dominate in indices in Japan, South Korea, and increasingly, China. Financial services are leading stock markets such as Hong Kong or Singapore, considered key hubs for the sector. Manufacturing is also big in China and Japan, with a strong focus on automobile production or electronics. The growing middle class in countries like China and India is also giving more and more prominence to companies focused on retail and e-commerce.
Many different factors drive Asian stock market indices, but the main factor behind their performance is the aggregate results of the component companies revealed in their quarterly and annual earnings reports. The economic fundamentals of each country, as well as their central bank decisions or their government’s fiscal policies, are also important factors. More broadly, political stability, technological progress or the rule of law can also impact equity markets. The performance of US equity indices is also a factor as, more often than not, Asian markets take the lead from Wall Street stocks overnight. Finally, the broader risk sentiment in markets also plays a role as equities are considered a risky investment compared to other investment options such as fixed-income securities.
Investing in equities is risky by itself, but investing in Asian stocks comes along with region-specific risks to be taken into account. Asian countries have a wide range of political systems, from full democracies to dictatorships, so their political stability, transparency, rule of law or corporate governance requirements may diverge considerably. Geopolitical events such as trade disputes or territorial conflicts can lead to volatility in stock markets, as can natural disasters. Moreover, currency fluctuations can also have an impact on the valuation of Asian stock markets. This is particularly true in export-oriented economies, which tend to suffer from a stronger currency and benefit from a weaker one as their products become cheaper abroad.
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