Worries about a looming U.S. "fiscal cliff" are hurting risk appetite and weighing on global equity markets, although Asian shares should weather the storm better than other markets, analysts said.
Asian stock markets fell more than one percent on Thursday, following a drop of two percent in Wall Street shares as focus turned to impending U.S. fiscal tightening with this week's presidential election now out of the way.
The U.S. economy faces the possibility of $600 billion worth of automatic spending cuts and tax hikes at the start of 2013 unless Congress can reach a deal to mitigate the impact. This could lead the U.S. into recession, the prospect of which is driving investors to exit U.S equities.
Any fiscal tightening that hurts the U.S. economy would have a knock on impact for Asia's export-driven economies and in turn regional markets, but there is a silver lining for Asian shares, analysts said.
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"If the automatic spending cuts are imposed, it would amount to an approximate 5 percent contraction in budgeted fiscal spending. This would clearly be negative for the U.S. recovery and the associated Asian export markets," Andrew Swan, head of Asian fundamental equities at fund manager BlackRock, said in a note.
"On a more positive note, we believe President (Barack) Obama will continue to support the quantitative easing program, which should be supportive for Asian equity markets given the resulting increased global liquidity," Swan said referring to the aggressive monetary stimulus unveiled by the U.S. Federal Reserve in September to revive the U.S. economy and which analysts said is having a spill-over effect on Asian markets.
Global quantitative strategist at Jefferies in Hong Kong said: "We do see mutual fund investors preferring emerging (equity) markets over developed markets ever since the Fed announced QE3 (quantitative easing) until the most recent week."
Hopes for fiscal stimulus following China's leadership transition could also help buffer Asia stocks from headwinds elsewhere, said Vishnu Varathan, market economist at Mizuho Corporate Bank in Singapore.
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"There is some speculation about a fiscal package to kick-start Chinese growth so you may want to stay long Asian stocks for now," he said.
US the Laggard?
Stock markets have posted strong gains since June amid general optimism about the economic outlook, but U.S. equities have started to underperform their peers as focus turns to the pressing U.S. fiscal troubles.
The S&P 500 stock index has gained 9 percent since June, lagging gains of 16 percent in European stocks and a rise of 18 percent in Asian shares.