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Quarter-End Insights

Asia Markets Underperform in 1Q, but China Advances

Political unrest and the disaster in Japan bog down sentiment.

Asian equities underperformed U.S. stocks as political unrest in the Middle East and North African nations followed by a disastrous earthquake and tsunami in Japan bogged down sentiment.

Year-to-date through March 30, Japan's Nikkei fell 5.1%, while India's Sensex declined 5.9%. Hong Kong's Hang Seng rose 1.8%, while Australia's ASX slipped 1%. Mainland China's Shanghai Composite, however, bucked the largely negative trend to surge 5.3%.

Demonstrations against a long-ruling regime in Tunisia triggered a political revolution in Egypt, where Hosni Mubarak stepped down from 30-year rule, and sparked uprisings in Algeria, Bahrain, Jordan, Oman, Yemen and even Saudi Arabia, with citizens taking to the streets urging democratic reforms and change in government.

Protests against Col. Muammar Gaddafi's regime in Libya saw the military clamp down violently, leading the United Nations to impose a no-fly zone in the country and U.S.-led allied Western forces to carry out aerial strikes.

The conflict in oil-rich Libya sent crude prices surging--Brent crude gained over 23% in the three-month period--leading to concerns of a derailment in the global economic recovery.

On March 11, a devastating earthquake measuring 8.9 on the Richter scale shook Japan and triggered tsunami waves that may have reached up to 30 meters high in some areas. The earthquake crippled several nuclear power plants after cooling systems broke down, leading to a meltdown scare, as Japanese authorities prepared full-scale operations to tame the radiation-emitting power plants.

The events sparked an outflow from risk assets, and the Japanese yen surged to an all-time high against the dollar, prompting intervention from monetary authorities globally.

In Tokyo, automakers were the worst hit as the potential for production losses led to concerns of lower profits. Suzuki declined 7.9%, Mitsubishi Motors was off 13.6%, while Mazda Motor lost 21.9%. Electronics majors  Sony (SNE),  Canon (CAJ),  Panasonic (PC) and Ricoh (RICOY) dropped 9% to 18% for the trailing three months.

Chinese stocks, however, turned in a robust performance after lagging other key indexes for most of last year as the government appeared to take steps to rein in inflation and excess spending in order to cool down the economy.

Metals major Aluminum Corporation of China rose 15%, realtor Gemdale Corp gained 11%, while China Merchants Bank added 11.1% for the trailing three months.

In India, global cues along with domestic inflationary pressures weighed on the index. Developer stocks declined the most, thanks to a cyclical slowdown in property prices and sales. DLF, Indiabulls Real Estate, and HDIL dropped about 8% each in the quarter.

Telecom stocks were pressured after it was revealed that the previous government had allegedly sold spectrum at below-par rates, causing billions of dollars of losses to the state.

Reliance Communication and Tata Teleservices lost about 20% and 14%, respectively. Property firms DB Realty and Unitech, which had forayed into telecom a few years back and whose names were directly linked to the scandal, erased 36% and 39%, respectively, in the three-month period.

Meanwhile in Sydney, heavyweight miners  BHP Billiton (BHP) and  Rio Tinto (RIO) were roughly flat in the quarter, but in financials, National Australia Bank (NAB) and  Westpac Banking (WBC) climbed over 7% even as the Australian central bank hiked interest rates, a move that showed its confidence in the country's economy.

Nazim Khan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.