* Valuations look attractive, but outlook uncertain
* Yen falls as stocks rise; G7 warning in background
* Emerging markets at risk of capital flow drought
(Recasts, updates prices, adds comments, European outlook)
By Kevin Plumberg
HONG KONG, Oct 28 (Reuters) - Stocks in Hong Kong, Japan
and South Korea rallied on Tuesday, boosted by irresistible
valuations, pushing down the yen, though investors were still
expected to pull money out Asia in anticipation of a deep
global slowdown.
The bargain hunting was not expected to spread to Europe,
where major stock indexes were seen opening as much as 2
percent lower, according to financial bookmakers, as sharply
slower growth expectations were priced in.
Large financial institutions such as Mitsubishi UFJ
Financial Group <8306.T>, Japan's biggest lender, saw their
stocks tumble for a second day as investors focused on the
investment portfolios of Japanese banks that have likely
deteriorated after the Nikkei share average fell 25 percent
this month to a 26-year low.
"We are recouping our losses now after such big declines.
But there's still some concern about the depth of the U.S.
recession," said Louis Wong, research director with Phillip
Securities in Hong Kong. "The yen has weakened so that may have
helped this rally."
Investors from hedge funds to mutual funds have been
cutting their holdings of emerging market assets to raise cash
for redemptions and to reduce the risk of further losses.
The rapid pace of declining global equity markets have
caused valuations of some Asian stocks, using measurements like
price-to-earnings ratios, to tumble to levels as in Hong Kong's
case last seen after the Asian financial crisis.
"We dont know whether this is the fabled 'capitulation'
because we dont know how far the hedge fund sector has to
shrink. But we do think that the monetary storm may be peaking,
despite the further widening in plain vanilla credit spreads,
and stress-tested PEs may be approaching the sensationally low
levels needed to revive risk appetite (for those investors able
to buy, that is)," HSBC equity strategists said in a research
note.
The yen's drop came a day after Group of Seven powers
issued a rare statement singling out the yen's volatility as a
threat to market stability, a move that was seen giving
Japanese officials scope to intervene.
The dollar soared almost 3 yen in less than an hour to a
high of 96.20 yen before slipping back to 95.35 yen <JPY=>. The
euro shot up more than 4 percent to a high of 120.64 yen before
slipping back to 119.30 yen <EURJPY=>.
The Nikkei index <> finished 6.4 percent higher after
earlier dropping to its lowest since 1982. Japan earlier said
it planned to impose a ban on naked short selling to deal with
turmoil in the stock market.
The MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> rose for the first time in five days, up 1.8
percent after earlier hitting a 4-year low. The index is down
60.7 percent so far this year, exceeding the 49.7 percent
decline in the all-country world index <.MIWD00000PUS>.
Hong Kong's Hang Seng index <> climbed 6.1 percent
after plummeting more than 12 percent on Monday in its biggest
single-day decline since 1997. Shares of global lender HSBC
<0005.HK> jumped 9.3 percent, leading the rebound.
South Korea's benchmark KOSPI <> rallied 5.6 percent,
led by high-tech exporters like Samsung Electronics
<005930.KS>. The Korean central bank's biggest ever rate cut on
Monday as well as a host of measures to bolster markets have
had spotty success in boosting sentiment on equities.
EMERGING MARKETS ALERT
The fundamentals underpinning the market remained shaky.
Credit markets overall appear to be stabilising but there
are still pockets of uncertainty. The 3-month Hong Kong dollar
interbank rate has climbed 70 basis points in the last four
days, suggesting economic pressure may be weighing on
short-term lending conditions.
Also, the global earnings picture is dismal. So far
quarterly earnings for the U.S. S&P 500 are down 11 percent,
based on actual third quarter results and estimates, according
to Thomson Reuters data. If held, it will be the first time the
S&P 500 has recorded five consecutive quarters of negative
earnings growth since 2001 to the first half of 2002.
Investors remained extremely wary of countries running
current account deficits and, in Korea's case, with a
significant amount of foreign debt that is vulnerable to a
freeze in funding.
They also have been pulling out of emerging markets en
masse, exacerbating the collapse in economies such as Iceland
and Hungary that have had to seek emergency loans from the
International Monetary Fund.
Stephen Jen, global head of currency research with Morgan
Stanley in London, has grown increasingly pessimistic about
emerging markets.
He said in a note that capital flows to emerging markets
could fall to as low as $300 billion from $750 billion averaged
over the last two years if global economic growth slowed to 1
percent.
"Opinions will quickly shift from 'this is unfair as
emerging markets have solid fundamentals' or 'emerging market
assets have already fallen too much for investors who haven't
sold to sell now', to 'could the emerging markets story have
been exaggerated all along?'" he said.
Japanese government bonds dropped as equities recovered.
December 10-year JGB futures fell 0.9 point to 137.25
<2JGBv1>. The benchmark 10-year yield climbed 5 basis points to
1.525 percent <JP10YTN=JBTC>.
Central banks around the world have been trying to ease
borrowing costs to lessen the blow of a sharp slowdown.
The Federal Reserve is widely expected to deliver a 50
basis points rate cut on Wednesday. Some high-profile
investors, such as BlackRock's Bob Doll, believe the Fed's
target rate may need to go to zero percent to shore up the
economy.
Oil prices <CLc1> turned positive, with dealers trying to
find some momentum in the stock market rally. U.S. crude for
December delivery rose 19 cents to $63.41 a barrel, still not
far from near a 17-month low.
