Asian sell off as news of Greek default looms

Asian markets booked heavy losses amidst concerns over a Greek default and the consequential impact on the region.  There is a growing acknowledgement among the market now that Germany is preparing for a Greek default scenario. The impact is unknown and while priced in by the market already, as implied by Greek bond yields, an orderly default scenario is the best case scenario.

The Australian stock market suffered the region’s largest losses, closing 3.7% lower on the news. Financials were hard hit, down around 3.9% with new concerns, mainly from offshore investors, over the domestic banks’ exposure to residential property.

Australian financial institutions have very little lending risk in Europe, with the exception of National Australia Bank (NAB) which has a considerable UK business. Domestic banks have also learnt from GFC lessons and broadened their funding mix, with ANZ for example now 60% funded by retail deposits. Should liquidity concerns continue overseas and whole funding markets dry up, the impact to total funding for domestic Australian banks is limited.

However, we do not think that the banks are immune to the global fall out and therefore, they may continue to be affected by investor sentiment. Eventually, their yields which look sustainable should support share prices, not too far off these levels.

Also in Asia, India’s industrial production grew but at a slower than expected pace, surprising some who see this economy as an offsetting factor for any China slowdown. Output at factories, utilities and mines rose 3.3% from a year earlier, following an 8.8% gain in June, the Central Statistical Office said today. Market expectations were for a rise of 6.2%, underscoring the difficulty in predicting Indian growth and the timing of industrialisation. Recent efforts to curb inflation could explain some of the growth moderation.