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Market selloff in Asia may get worse, say analysts

Analysts said the market selloff in Asia might get worse amid renewed fears over faltering emerging markets and tighter credit conditions in China.

SINGAPORE: Asian markets tumbled on Monday as fears over faltering emerging markets surfaced.

Investors are also cautious as tighter credit conditions in China continue to weigh on markets.

Against that backdrop, some analysts said the selloff in Asia might get worse before it gets better.

Equity markets were in a sea of red on Monday. Japan led the decline with the Nikkei dropping more than two per cent to its lowest in two months.

Investors sought refuge in safe haven currencies which pushed up the yen and in turn hurting exporters.

Stocks in Hong Kong also dropped to a five month low, while those in Singapore and China traded more than one per cent down

That flight to safety was triggered on January 24 when preliminary numbers showed China's manufacturing numbers contracted.

Experts said the slump in markets on Monday is mainly sentiment driven and it comes off the back of weak economic numbers out of China last week. They added that investors will be keeping an eye out for policy changes and money market developments in China in 2014.

Yet, for the immediate term, things could look worse.

Daryl Liew, head of portfolio management at Reyl Singapore, said: "This is going to be a short trading week for a lot of the Asian markets because of Chinese New Year (CNY) and there is no new data coming out of China until after CNY so you won't get a positive blip out of China in the next couple of weeks."

However, Liew said the impact of China Credit Trust Co's troubled high yield trust could impact the market.

"There's that overhang with the wealth management product (China Credit Trust Co's Credit Equals Gold No1 Trust) in China which is possibly going to default on January 31. Obviously, that will be an issue that could be the start of the unravelling of the shadow banking in China," said Liew.

China Credit Trust Co. has said it would restructure the loan behind the three billion yuan (US$496 million) product, potentially alleviating the chances of a default that could have rippled through the financial system.

Political risks in Turkey and Thailand, coupled with Argentina's sudden devaluation of its currency are also spooking investors in a week when the US Federal Reserve is expected to cut its monthly bond purchases by another US$10 billion.

Still, some experts are not expecting a repeat of last May's financial markets bloodbath.

Vasu Menon, head of content and research at OCBC Bank, said: "If you compare the fundamentals in Asia to Latin America, the fundamentals in Asia are stronger. Governments have learned from what's happened in Europe and US and elsewhere. They've been more proactive in trying to curb asset rice inflation, and trying to address budgets and current account deficits."

"The correction is not going to be as severe, perhaps maybe five to eight per cent from where it is right now is possible but it won't stay there for too long because there's a lot of liquidity in the system - liquidity looking for better returns, better yields."

However, if the selloff continues, analysts said the Fed may be forced to slow down its pace of tapering.

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