Traders should look to Asia for volatility and long-term bets
WHATEVER Alistair Darling might be saying about V-shaped recoveries, in Europe and the US most of the talk is about a slow and protracted upturn. It’s otherwise in Asia, where economies are widely tipped to be the first to pull out of the global recession. There are three reasons for this: firstly, lower commodity prices have benefited these countries, which are the world’s largest importers of oil and other commodities; secondly, their fiscal stimuli as a percentage of GDP dwarf those in Europe and the US – 3.5 per cent compared to 1 per cent; and thirdly, a growing middle class across the region means that there is plenty of scope for robust domestic demand in the future.
Contracts for difference (CFDs) traders tired of trading the FTSE 100 and Wall Street could look towards these more exotic Asian indices for a challenge and profit potential. However, emerging market Asian stocks are not for the faint hearted. They can be volatile and often rise or fall sharply in one day depending on newsflow both in Asia and in the developed world, which imports many goods produced in places such as Taiwan, South Korea and Thailand. Weak outlooks from Asian blue-chips such as Sony can cause a sharp drop in other indices in the region, as shown by the South Korea 200 graph below.
That said, stronger economic credentials ought to boost investment in domestic listed companies and CFD traders should therefore expect long-term rises in the indices. However, political change might be needed if these countries are to capitalise on their potential. Take India, where the Congress Party’s landslide victory means it is no longer reliant on Communist allies, which had previously blocked liberal measures and economic reforms. The next government is expected to be more stable, less corrupt and crucially at a time of economic crisis, more efficient. Strategists responded positively to the change in government. Morgan Stanley analysts revised their GDP growth forecast upwards for 2010 to 5.8 per cent from 4.4 per cent.
Its month-long general election also awoke traders’ interest in the India 50 index – also known as the Nifty Fifty – which last Monday soared from an open of 3,950 to 4,670. James Hughes, analyst at CMC Markets, thinks that this should interest traders: “The Indian election and subsequent price response in the market certainly wasn’t an everyday event, but as this has shown the big geopolitical calendar events like this can certainly present some very valuable trading opportunities,” he says.
The bad news is that it can be tricky to trade on Asian indices. India is four hours ahead of the UK and other Asian countries much further ahead, so it can be difficult to take advantage of movements in these indices, although low margins of 1 per cent with some providers make them attractive.
This is where you need to make the most of your limit orders and stop losses to open and close positions automatically so you can go to sleep. You can also place a pair of orders in what is known as an if-done. In addition to placing your buy order, you can also set a sell order too, which will only kick in if the buy order had already been activated.
If you had done this for the election and called the market wrongly, ie, the election was seen as bad news by the market, then the index would have presumably collapsed – it did so by about 17 per cent when the previous government was formed – but the orders you had placed wouldn’t have been triggered, so no costs and no losses are incurred.
Trading the emerging market Asian indices calls for plenty of trading experience and canny use of stops and limit orders if you like your sleep.
While this slump has affected emerging Asia as badly as the region’s financial crisis in the late 1990s, these countries’ stocks should see a faster recovery than those in the developed world. CFD traders should consider a longer-term strategic CFD while they’re still cheap.