Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Imminent Rebound In 2H2009 .. But With Threats !!!
Recession – Recovery – Growth – Boom - Burst
(Stabilizing Stage But Need More Improvements For Recovery Theme To Play Out)
a. What’s NEXT For The Global Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
b. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
c. What’s NEXT For The US, China & Malaysia Equities Market
d. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
e. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
f. What’s NEXT (2H2009) For The Malaysian Equities Market …
g. Factors That Could Derail The Global Economic Recovery …
h. Carry Trades Are Making A Come Back Into Emerging Markets
i. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).
j. Beyond 2Q2009 Corporate Earnings Malaysia Listed Companies
a. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
Signs that Asian economies are on a recovery path are growing although the pace of recovery will likely be moderate.
The worst is behind Asia, given the emergence of more signs of a bottoming-out in the region and globally. Asia (economies) have bottomed out and will stabilise. Recent data from G7 countries showed that the recession in these countries is easing. The worst is clearly over.
The Organisation for Economic Cooperation and Development’s (OECD) composite leading indicator, which rose for a fourth month in June 2009, was a clear sign of the bottoming out in the United States, Japan and Europe.
Asian economies are about to turn the corner and raise their contributions to the global gross domestic product (GDP). It (Asia) will stabilise and recover in the second half of this year (2009) and continue to improve in 2010 on increasing external and domestic demand
Growth in China, India and Indonesia would remain robust while in Malaysia, Singapore and Thailand, the pace of growth could remain uneven. Other Asian economies that have entered the positive territory in the second quarter of the year (2009) are South Korea and Singapore with a growth of 2.3% qoq and 20.7%, respectively.
But Malaysia is still lagging, with the tide expected to turn only in the third or fourth quarter of 2009. Perhaps, Malaysia can learn the benefits of speedy implementation of economic stimulus programmes from some of these Asian countries that have successfully averted technical recessions, so that its economy too can recover alongside those of its peers.
On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.
Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.
Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.
So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.
Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).
Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.
Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.
2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.
If there is any rate action, it will be in baby steps and probably in the second half of 2010. It did not see a resurgence in high inflation now (Aug 2009).
High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”
There was a need to reinvent Asia and make a shift from external demand to domestic demand.
Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.
The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.
It also encouraged investors to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery.
By AMResearch …
News that Germany and France have emerged from a recession has helped to underscore a positive vibe that has slowly gained momentum following one set of encouraging news after another.
The news of two major economies coming out of recession in Europe follows news of strong quarter-on-quarter economic growth in Singapore during the second quarter 2009 and Indonesia’s economy growing by 4% in the second quarter 2009 from a year ago.
The huge fiscal stimulus announced by the Government would work its way deeper into the economy in the months ahead (Aug 2009 & Beyond) and that should help lift economic growth into positive territory in the fourth quarter 2009.
The global recovery in exports had resulted in higher production in most parts. We also see more signs of a bottoming out in the case of domestic demand as deterioration in labour markets has somewhat been mild.
It is almost consensus that a global recovery would occur by the second half of 2009, but it would remain modest, Malaysia will not be left behind, though it may lag due to structural and policy constraints.
The economic recovery would be U-shaped rather than V and felt that economic growth would contract by 5% in the second quarter 2009. GDP would contract by 3% in the second half of this year (2009) but economic growth should turn positive in the final quarter of the year 2009. Expecting GDP to grow by 1,5% in the fourth quarter 2009.
By Affin Investment Bank …
The recovery in the US and Europe would continue in this half of the year (2009) and US fiscal stimulus, along with increased auto production from the cash for clunkers programme, would help economic growth.
Private sector economists and the market are having higher expectations on the recovery.
Expecting Malaysia’s full year GDP to contract by 2.8% against the Government’s current estimate of a shrinking of between 4% and 5% of the economy this year (2009).
By Maybank Investment Bank Bhd …
The better industrial production numbers in the second quarter should point to a smaller contraction in economic growth in the second quarter 2009.
Predicts Malaysia’s real GDP will contract 5.9% year-on-year in the second quarter 2009 after falling 6.2% year-on-year in the first quarter and expecting the economy to expanded by 2.5% last quarter (2Q2009) from the first quarter after shrinking 3.4% quarter-on-quarter in the fourth quarter of 2008 and 7.7% quarter-on-quarter in the first quarter of 2009.
By AmResearch …
Signs of a recovering global economy have convinced economists that Malaysia could have seen the worst in the first quarter (1Q) of 2009, prompting some to price in positive numbers for the country’s gross domestic product (GDP) as early as 4Q this year (2009).The optimism is based on a gradually improving external trade environment, albeit still contracting at a slower pace, and rejuvenation of domestic demand in recent months, helped by policymakers’ monetary and fiscal policies.The general view is that the country will likely register its first full-year GDP contraction in 2009 since the regional financial crisis in 1998, given that the economy in the second and third quarters of 2009 will continue to shrink against the backdrop of a still weak global platform.Malaysia’s economy could see smaller annual contractions in the second and third quarters before registering growth in 4Q 2009. The optimism is based on a recovering Malaysian manufacturing sector due to demand from regional countries such as China, India and Singapore.
Although external demand may be weak, expecting significant improvement in domestic demand due to the easing of monetary policy and higher fiscal spending.Since the regional economies will not get much help from the global economy as was the case in the late 1990s, reckon that Malaysia’s recovery will most likely follow a U-shape.Malaysia’s economy has shown some signs of a bottoming out in tandem with the pick-up in confidence as well as manufacturing activity.
While there were signs of a recovery in the global electronics sector, it was still unclear whether these were indications of inventory rebuilding or rising final demand.Its principal worry is the sustainability of global recovery, especially in the US and Europe. What if growth stalls, and what if recent stimulus programmes fail to stimulate domestic demand? Also, the Americans are becoming net savers rather than spenders in recent months.By TA …The Malaysian economy could have reached its trough in the first quarter 2009 and was expected to be dictated by weaknesses in the domestic and global landscape.In the sub-division of supply, the manufacturing and construction sectors may be the drivers of economic growth. Not to mention, the liberalisation of the services sector in line with the New Economic Model may stimulate growth within the services industry.
Moving into 2010, the Malaysian economy may observe growth on the premise of a rebound in the international trade segment, parallel with the increase in investment expenditure.Anticipates that Malaysia would register an annual GDP contraction of 4.6% in 2Q 2009, before posting a decline of 4.2% in 3Q. Fourth quarter GDP is expected to expand by 2.8%. Full-year GDP is expected to shrink by 3.1% in 2009 before registering a 3% expansion in 2010.The government has initiated two economic stimulus packages with a combined value of RM67 billion to boost domestic demand to counter-act falling exports.
By RHB …Global recovery was on track considering that credit markets had stabilised while downside risks to economic growth had dissipated.Business and consumer sentiment, besides investors’ risk appetite, have improved, resulting in better asset prices and a more manageable world economic landscape. The recovery pace, however, will likely be slow and gradual given that the corporates and households in the developed countries that have gone through the massive destruction of wealth would still need to repair their balance sheets before they can spend more aggressively for an economic revival. The improvement in the global economic outlook will likely translate into an improvement in demand for Malaysia’s exports in the second half of the year (2009).For now (Aug 2009), while many claim to see the light at the end of the tunnel as major economies such as the US and European nations exhibit more encouraging economic data, it is worth noting that high unemployment rates may continue to stifle demand in the coming months (Aug 2009 & Beyond).Going forward, one trend that will be keenly monitored is how generous lenders are in extending lines of credit to consumers and corporates. These could be tell-tale signs of Malaysia’s economic fortunes in the months ahead (Aug 2009).
By MIER …
Malaysia may not be able to cut its deficit to below 7 per cent of gross domestic product (GDP) in 2010 as it needs to spend to spur the economy. Malaysia will probably have large deficits for "years to come" and 10-11 per cent in 2010.A bigger deficit could lead to a weaker ringgit and lower the country's sovereign ratings, but this should not be a big worry now (Aug 2009). The government can offset this by showing a clear timetable to balance the books and a timeline to achieve it, and how it proposes to increase revenue.
Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah had said the government plans to cut operating expenditure by 15 per cent next year (2010) to rein in the budget deficit.After announcing RM67 billion worth of stimulus measures, the government expects the deficit to rise to 7.6 per cent of GDP.The 15 per cent cut in operating expenditure sounds like a tall order requiring painful adjustments ... it's easier said than done. The only way the government can bring down the deficit is through controlled expenditure.
By Khazanah …
Meanwhile, Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar said the Malaysian economy has not fully recovered from the 1998 financial crisis in many respects. The last five to six years (2004-2008) have been a commodity boom. With a country rich with commodities we should not be having a fiscal deficit. This betrays a deeper structural issue.Azman also expressed concern about the drop in investments. Savings have remained in high 30 per cent while investments have dropped 20 per cent, raising the question as to why the corporate businesses have been investing less and what needs to be addressed.
b. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY.
Common questions facing investors are: If they are not in yet, should they continue to stay out? And for those who are already in, is it time to cash out?
The dilemma is a tough one but the events that have unfolded may provide some insights into what to expect in the new few months (Aug 2009 & Beyond).
The hyper bull market in China was undone by what had started in the first place. Signs of tightening credit appear to have burst the bubble in the China stock market and coincidentally deflated the tyres of a five month (Early Till Mid Aug 2008) undisrupted rally, not only in that country but also other Asian bourses.
Right now (Aug 2009), the global stock markets seems to be still holding up despite the steep fall in China. However, with stock market volatility increasing, fund managers are expecting a correction n the next few months (Aug 2009 & Beyond) of between 10% and 15% or even up to 20% at the most.
Having said that, rather than seeing it as a fear factor, investors should see opportunities for the accumulation of stocks. Some believe that the global stock market is entering a correction phase, though it still seems resilient at this point.
Risk premium has come down a lot compared with earlier 2009 as earnings and macro numbers stabilize. Doubts there is any significant correction other than investors taking the opportunity to take some profit before buying again.
Morgan Stanley said that the recent turbulence (Aug 2009) in risk markets such as China is just a correction. It states that it will not get bearish until it sees policy tightening, material macro data disappointment or excessive valuation.
NONE IS APPARENT NOW (AUG 2009).
What is notable is, first, global markets taking their leads from Chinese markets, and second, the hyper sensitivity of equities to any hint of policy tightening. WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY.
The global stock market trend in the mid Aug 2009 SUGGESTS THAT WHAT CHINA WILL DO WILL MATTER FOR EVERYONE.
All eyes are on China to maintain a fine balance between a stimulating its domestic economy and not creating bubbles in real estate as well as the stock market. Creating and subsequently allowing the asset bubble to burst will have serious repercussions for china’s banking sector, which disbursed RMB7.73 trillion of loans in the first seven months alone.
It will unsettle sentiment among global investors as well. THERE IS INCREASINGLY MORE CO-RELATION BETWEEN THE MOVEMENTS OF CHINA’S STOCK MARKETS AND THE WORLD’S MAHOR EXCHNAGES IN TERMS OF INVESTOR SENTIMENT, ESPECIALLY IN ASIA.
Geographically, we are close to China. Also investors sees Asia as a growth centre, with China taking the lead. Hence, it is not surprising that the China stock market has become an important pointer for its neighbours.
For markets to sustain current valuations (Aug 2009) and even extend from here (Aug 2009), earnings expectations increasingly have to be met or beaten as we move into year end (2009).
The markets may be expensive but they are not excessively expensive, even for the China stock market. Which is why any correction is unlikely to be significant. It is understandable that the US stock market does not command the kind of premium that Asian markets do because there is a greater risk of earnings shortfall in the former and that the US economy, even when it recovers, will not grow as fast as the Asian economies. The US IS NOT A GROWTH MARKET!
Going forward, if China remains a leading indicator, and if the situation in US continues to be stable, investors are unlikely to have to worry too much. Opportunities will arise for those who have missed the boat.
The consensus view is that with China’s exports still weak and unemployment rising, China will continue its expansionary fiscal and monetary policy. It is just that there will more scrutiny to ensure that credit resources are diverted to productive investments, which will strengthen real economic activities rather than continuing to create bubbles in the stock market and real estate sector.
The global equity market may be entering a transition phase from one led by a recovery in Chinese growth to one where growth is led globally by a recovery in the US going into year end (2009) as well as ongoing growth in China. While a near term correction may emerge, investors should remain focused on their longer term risk appetite and goals and engage in rebalancing their portfolio towards these targets.
The new trend is that investors may increasing benefit from shifting their focus from macro driven factors, such as the Chinese economy, to concentrating on stock selection, which will be the key.
c. What’s NEXT For The US Equities Market
As equity investors ponder whether the recent (Aug 2009) pullback in equities is just a brief pause for breath in an extended rally, fixed-income markets are signalling a less optimistic view of the economy and the consumer.
Until late Aug 2009, equities had diverged from the bearish performance of corporate credit and steady decline in Treasury yields. Then, equities were hit by selling, a move which extended the weakness in credit and boosted government bonds further.
This split in thinking has long been a feature of trading across asset classes, with equities usually reflecting a more optimistic view of the economy and the consumer. But over the Aug 2009, the debate over the sustainability and strength of a recovery in economic activity has intensified.
Equities in Japan, Europe and the UK have also pulled back after a strong rebound from their lows in March 2009. While data from Japan, France and Germany show that their economies have pulled out of a recession, doubts remain about how quickly activity will normalise. There are a number of headwinds in the economy and they are not really going away very quickly or easily.
Economists expect the US will expand in the third quarter 2009, as low inventories are built back up, but recent US data (Aug 2009) has highlighted weak consumption and tighter credit standards. The latest Federal Reserve loan officers survey for the three months ending July 2009, revealed further tightening in lending conditions.
Against a backdrop of high and rising unemployment and declining real incomes, it would be a leap of faith to suggest that this situation is going to change any time soon.
That has fuelled a Treasury rally, with the yield on the 10-year Treasury note back below 3.50 per cent, down from near 3.90 per cent at the end of the first week of August 2009. Once you stabilise, the recession ends, but the reality is that US face very weak growth as consumer balance sheets take time to adjust. There have been solid inflows into Treasuries since yields recently (Aug 2009) peaked.
Institutional investors such as Pimco have recently sought to lower their risk to some areas of the credit market, such as high yield, which has rallied more than 30 per cent this year (Till Aug 2009). High yield has been the winner of the year and it's time to turn cautious.
The second half of the year (2009) is going to see choppy waters for credit and that is a function of the economic reality being pretty weak with credit being range bound.
For many companies, however, cost-cutting translates into slashing jobs or wages, and the bleak employment picture, in turn, weighs heavily on consumer spending and confidence.
Consumers in different income groups have their own reasons to keep a lid on spending, be it high unemployment in the low-income segment, the overlevered balance sheets of the middle class, and lost wealth and fears of tax hikes among high earners.
US Equities have yet to fully reflect the consequences of declining nominal sales and incomes, which in part was evident in the economic data from the latter part of last week (Aug 2009).
The bank warns: "In particular, with an absence of corporate cheerleading for the next couple of months (Sept 2009 & Beyond), the economic news will likely need to improve somewhat for equities to make much headway during the tricky months of September and October 2009.”
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In the past five months (March 2009 – July 2009), the world’s stock markets have gained more than 50 per cent. The big question now (Aug 2009) is: where next? This rally is not unprecedented but history offers few comparisons. Those that exist are all imperfect and contradict each other. But rallies in the last century stand out:
1930. In the wake of the Great Crash, the S&P 500 staged a rally a lot like this one. From its low on November 12 1929, it rallied 47.2 per cent in five months. This fooled many. Anyone who bought at the top of the rally, on April 10 1930, would have lost 83 per cent over the next two years. If there is a rally for the bears to cite in their cause, this is it.
1932. Marking the very bottom of the 1930s’ bear market and arguably the most impressive rally in stock market history, the S&P did twice as well as in this current rally (March 2009 – July 2009), in half the time. It rose by 111 per cent in the 10 weeks from July 8.
This time (March 2009 – July 2009), the lows were never revisited. But the outlook was not good. After that violent upswing, just before the election of Franklin D. Roosevelt, the bear market dragged on for decades, with gains only for opportunists. The S&P fell 25 per cent once more by the end of 1932 and it would fall below its level of September 1932 in 1934 and again in 1938. This was not a great time to buy and hold.
1975. After the savage 1973-74 bear market, stocks enjoyed a 53.8 per cent rally from October 12 1974 to July 15 1975. In one five-month span, it gained 47.1 per cent.
In hindsight, it looks like a cousin of the 1932 rally, as the rally gave way to a bear market that ground on for the rest of the decade. Stocks were no higher three years later. Profits were only for opportunists.
1982. With Paul Volcker at the Federal Reserve still attacking inflation, and Margaret Thatcher and Ronald Reagan applying unpopular economic medicine, the 15-year bear market suddenly ended.
In the five months after August 12 1982, the S&P gained 43 per cent, starting a secular bull market that lasted until the tech bubble burst 18 years later. August 1982 was possibly the best time ever to buy stocks; early 1983 was still a good time.
This is the rally that bulls call to their aid. Those alarmed by the potential for fresh crises in emerging markets can even point out that this rally survived the first great Mexican devaluation crisis, which hit in the early weeks of the equity rally.
What did these rallies have in common?
Pessimism had grown overwhelmingly, with fear far outbalancing greed when they started. Except for 1930, they came near the end of severe recessions. They have both points in common with the current (March 2009 – July 2009) rally.
But there are differences. The rallies of 1932, 1975 and 1982 came when stocks were unambiguously cheap, and were still cheap after the initial 50 per cent rally. The cyclically adjusted price/earnings ratio, a multiple of average earnings over 10 years, was at extreme lows.
But in 1930, stocks never dropped to long-term fair value before rallying and were blatantly expensive by the time the rally ended. This time, prices fell a bit below their long-term average for a few months but the rally has already brought them back to look expensive.
In the critical sense of valuation, then, this rally (March 2009 – July 2009) looks nothing like 1932, 1975 or 1982. It looks a little more like 1930.
The environment of inflation and interest rates differed widely. In 1930, western economies were lapsing into deflation; in 1932, the world was mired in deflation; in 1975, it was stuck in inflation; and in 1982, inflation was high but coming under control.
The current (March 2009 – July 2009) picture does not fit with any of these – consumer price inflation in the west has been tame for decades. Last year (2008)’s crisis created the risk of severe deflation but the prompt decision by governments to throw money at the problem is a huge point of difference from 1930. Those who believe the deflationary scenario can logically forecast a repeat of the 1930 collapse in share prices. But this is a pessimistic point of view.
Parallels with 1982 do not work any better. The 1980s’ huge gains from steadily lowering rates and innovation in the financial sector are not available this time around (2009). The very opposite is more likely.
The 1932 rally came in truly extreme conditions.
But the 1975 rally may be a decent match; it came during a restocking boom after companies had slashed inventories (very much what the market is betting on now (Aug 2009)), at a point when oil prices were volatile and exerting a big influence on the economy.
The world now (Aug 2009) is still different in many important respects from 1975 but this may just be the best comparison. That would suggest the most likely outcome now (Aug 2009) is a protracted dose of directionless trading. For those more optimistic or pessimistic, you have your examples to hang on to.
What’s NEXT For the China Equities market …
Foreign funds have fled China's stock market during this month (Aug 2009)'s slump as quickly as they rushed in earlier in the year (2009), when they bet on a V-shaped recovery in the world's third-largest economy.
The quick exit means foreign investors no longer believe, as they did during China's stock market peaks in 2006 and 2007, that a bull run in Chinese stocks can last for years (2009 & Beyond) - a clear shift in attitude after China's market was battered by the global financial crisis last year (2008).
Industry observers said that capital inflows into China over the next few years (2009 & Beyond) will not rise close to - let alone exceed - peak levels seen in early 2008, dampening expectations sparked by a rebound in China's foreign exchange reserves in the second quarter of this year (2009).
This should help to serve as a clear warning to investors to be more cautious about investment allocations in China, at least for the rest of this year (2009). Investors should be more defensive as China's market conditions will not be able to recover to their peak any time soon.
China's stock benchmark, the Shanghai Composite Index, fell 20 per cent over a early two-week (Aug 2009), partly reflecting Chinese companies withdrawing money from the market as they shifted bank borrowings from short-term investments into longer-term projects.
The tumble followed a 90 per cent rally from the start of the year that stalled amid concerns about stretched valuations, tightening liquidity and fresh supplies of equity in the market.
Funds are flowing in and out of the (Chinese) market very quickly this year (2009), bucking a trend seen in the last bull run in 2006 and 2007. Fund inflows from foreign investors keen to join that rally are considered one reason why China's foreign exchange reserves leapt by US$177.9 billion in the second quarter 2009, compared with just a US$7.7 billion gain in the first quarter 2009, as the cumulative April-June 2009 reserves far exceeded the combined net inflows from the trade surplus and foreign direct investment.
The central bank and other financial institutions spent 528 billion yuan to buy, or absorb, new foreign exchange flows into China in the second quarter 2009, up only modestly from 420 billion in the first quarter 2009. In July 2009, the amount was 220 billion yuan. Those figures were only a fraction of the quarterly peak of 1.41 trillion yuan in the first quarter of last year (2008), and 654 trillion in January of last year (2008).
With China's economy having proved vulnerable to the global crisis, overseas investors are no longer all that certain about the Chinese growth story.
The prospects for China's asset prices are also less certain. Add in the fact that the yuan is no longer appreciating against the dollar, and it will be impossible for capital inflows into China to recover to their peaks in coming months (Sept 2009 & Beyond), or perhaps even years.
That will have a clear impact on the medium-term trend of the stock market. We are set to see a lingering market consolidation, during which the index will move around the 3,000 point mark for at least several weeks (Sept 2009 & Beyond).
China's economy is still recovering, although not as quickly as the market had implied earlier this year (2009). Liquidity in the system is good but not as ample as many investors had expected.
The Shanghai Composite Index has rebounded since late Aug 2009 but is now (Aug 2009) moving in a narrow range between its short-term five-day moving average, currently around 2,900, and its medium-term 60-day moving average at 3,060.
The index has still risen around 60 per cent so far this year (2009). In the last boom-and-bust cycle, the index fell 65 per cent in 2008 after it had more than quintupled in the two years to late 2007, battered by a sharp slowdown in China's economy as the global crisis took its toll.
What’s NEXT For The FMB KLCI …
Many agree that the stock markets are entering a correction phase. However, the jury is still out on how severe this correction will turn out to be…
It is believed that it is the start of a correction, but whether this will be a major correction that everyone is talking about. Whether this correction will turn out to be a massive moderation of the market – that is a clawback of more than 50% - remains to be seen.
Let’s say that it is a correction to reverse the five months of relentless rise (April – July 2009) from 836.21 to 1196.46. It may be gentle at first but let’s see how the world markets also pan out in time to come.
Critics say that this is happening now (Aug 2009) as growth concerns resurface in light of the recent monetary tightening in China. The good news for investors, however , is that the correction will not be as severe as in previous rallies.
Analysis of the two previous bear rallies – in 1998/1999 and 2001 – indicates that the pullback after troughs tends to be transitory, stretching no longer than two months. And the dips were 15% to 22% off intermittent highs, before rebounding by stronger percentages.
This time around, the correction may be less dramatic because the starting point of the recent upswing was from a depressed trough PPE of 11 times in March 2009, versus 16 times in April 2001. In the immediate term, the market may dip 10% off Aug 2009 high of 1187, forming a base of 1068 in the worst case scenario.
At the end of the day, markets have gone up a lot and risk to reward is not as attractive as before. China aside, movements in the US market must also be taken into consideration. US markets are generally turbulent between Aug and Oct, so some unsteadiness should be expected there. As such 1196.46 may be the peak for the market for now (Aug 2009).
Meanwhile it is worth noting that overseas investors turned net sellers of Malaysian stocks in July 2009 for the first time in four months, as the Southeast Asian nation’s stock market continued to lag behind regional peers.Foreign funds unloaded US$121 million of Malaysian shares in July 2009, the equivalent of 56 per cent of the previous three months’ inflow. The reversal of fund flows is an “unwelcome surprise for us” and the outflow was “relatively steep”. All its regional peers enjoyed foreign fund inflows in July 2009.” Foreign funds “lightened” their holdings in stocks such as Genting Malaysia Bhd, Digi.Com Bhd and PLUS Expressways Bhd, he said. Funds added to weightings in banks including Public Bank Bhd, Malayan Banking Bhd and RHB Capital Bhd. Malaysia’s lower liquidity and velocity could be a symptom or cause, of foreign investors’ lack of interest in the market. The net selling could be a temporary hiccup that is consistent with past trends where it was relatively rare for foreign funds to be net buyers for more than three months running.
d. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
There is a shift taking place, as the world axis is moving from North America to Asia, or more precisely China.
He is advocating putting all of one’s eggs in one basket or betting big on a single trend.
He tries to identify long term trends and bet on them.
He is predicting that the next commodity bull run had just begun. What is driving this secular bull market in commodities is that there is no great supply of any major tradable commodity coming on stream to derail the commodity markets. If the world economy recovers, commodities will be the best place to be because there will be supply shortages, and if the global economy does not recover, commodities will still be the best investment because everybody will be printing money and you will have hard assets that will appreciate in value.
Moreover, the recent credit crunch (Aug 2008 – Feb 2009) has helped the commodities case. Farmers cannot get credit and mining companies are having problems getting loans. Because companies cannot raise money for exploration, there are going to be no new mines in operation. Because it takes up to 10 years from the day you start to the day you are in full production, the dearth of investment in recent years would lead (Before 2009) to more supply shortages for years to come.
He disagrees with the view that the commodities cycle peaked in 2008 and that it might be a while before the next upturn begins. What the world is seeing now (2009) is not a commodities bear market but a temporary lull in the bull market. There are corrections in every bull market. Commodities cycles in the past have lasted between 18 and 20 years does not mean the next one would be 18 years. The supply situation is getting worse and inventories for agricultural commodities are the lowest they have been in decades. That said that the current (2009) secular bull market for commodities may be a lot longer.
Over the last couple of years (Before 2009), his investment strategy has been long china, long commodities and short financial stocks.
Chinese stocks will at some point correct from their high levels (July 2009). But the further they fall, the better the opportunity for investors to accumulate.
Another side bet is water. China has a horrible water problem, which it needs to address. It needs water for agriculture as well as for drinking. India’s water problem is even more severe. He has been an early investor in China’s water treatment companies. The opportunity in the water sector is going to be huge over the long term.
Apart from his bets in commodities and China, he recently identified global airlines as a sector that will outperform. Airlines? In the next five to 10 years, you might find that global airlines would do very well. Over the next 10 years, the stronger players will have a stronger share of the market and better economies of scale.
After all, if Rogers is right and oil prices are going to go through the roof once again, would not airlines suffer? They might, but he is betting on a long term trend rather than a 12 month horizon.
His thesis is simple: If the world recovers, airlines will be back on track on demand from new Asian travelers.
In China, India and other emerging economies, people are becoming more prosperous and starting to travel within and outside their countries. It will take decades to build a vast network of highways in China, India, Indonesia and Brzail that is anywhere near those in Europe or North America.
Airlines will need bigger planes. There are two aircrafts manufacturers and they have production problems and there are serious capacity constraints with planes sold out for years.
Another Rogers’ big bets is agriculture and agricultural land. He believes agriculture is going to be the area of growth in the next decade (2010s) because it has been the most neglected sector. The biggest problem in agriculture is the shortage of able bodied farmers. For decades now (2009), young people all over the world had sought to leave the countryside and head for the bright lights of the cities. They wanted to work for bank or in some other high paying sector where they did not have to sweat and toil. The result is that in many places, most farmers are old men and as they die, there are not enough people left who want to do farming.
Moreover, farmers have already extracted most of the benefits from technology like better seeds and fertilizers to increase yields.
People are not going to stop eating. Indeed, increasingly prosperous Chinese, Indians and Brazilians are now (2009) eating better and somebody is going to have produce wheat, rice and vegetables to feed them. We have seen over the past few years that shortages are developing in a range of agricultural products and prices are still unbelievably low on a historical basis.
But a blind bet on agriculture just would not do. First you need to buy right farmland. No point buying land if there is no access to water or in an area with no rain. You also need the right farmers. With supplies down and demand for agricultural products growing, the potential for profits is huge. With the right farmland, farmers and the right crop, you can make a ton of money over the next 10 or 20 years because nobody else will have the supplies and everyone needs to eat.
He is ready to make a bigger long term bet against the US dollar. He has long been concerned about what he calls a looming currency crisis. Currencies crisis gradually build up. He does not thing we will have a currency crisis in 2009 or even next. But, something has to give. There are a lot of imbalances that are developing in the world. There is always a lag before things break down. At some point, something will trigger a crisis. When it does, the US dollar will fall sharply.
The lesson China can learn from the rise and fall of the US is that no country should ever get over extended – financially, military and geographically. The lesson for whoever is the next big power is to let the world take care of itself instead of trying to be the world’s policemen. Economically, all great powers make the same mistake of believing that they can consume rather save and invest. The nation that is not saving and investing as a nation is bound to deteriorate over time.
The US Fed will keep printing money until run of trees. He said that the best thing to do is to let the bad companies go bankrupt rather than keep zombie companies alive. The bad companies or their assets be taken over by competent people who can reorganize things and start over.
He also pointed out that Obama’s economic policies … you cannot solve the problem of too much consumption and too much debt with more debt and more consumption. That’s a recipe for disaster.
Throughout history, whenever governments have printed huge amounts of money or spent a lot of money they did not have, it will led to higher inflation.
e. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
After more than nine months of parched land in the investing world, investors have now (July 2009) turned more hopeful at the sight of “green shoots” sprouting here and there, especially among the Asian equity markets.Despite a mixed news flow on global economic indicators, optimism for the Asian equity markets had held steady, premised strongly on the notion that the region did not need a full recovery in the US, with strong performances led by China.As it is, most Asian equity markets have had positive performances. However, the rosy picture of Asian equity markets has on the flip side painted these markets as expensive. As such, Asian markets’ strong outperformance had made valuations relative to global equities less appealing.Although Asian equity markets are not as cheap and had shed some attractiveness to a certain extent, strategists have recommended that investors start looking for opportunities even from now (July 2009) on, and keep some stocks strongly on the radar.
Investors should start accumulating on weakness during the third quarter 2009, to position for further upside later in the year (2009).Asian markets are currently (July 2009) in consolidation phases, whereby investors are in the mood for profit-taking and rationalising their gains. This is mainly driven by the expected announcements of second-quarter 2009 gross domestic product numbers this month (July 2009), which in turn would cause the market to undergo a correction. After all, Asian markets had already priced in a lot of good news in the last three months (April – June 2009).Credit Suisse said while Asia was now (July 2009) trading at a 7% premium to global equities, some of the premium could be credited to China, which is leading the global recovery. While NJA’s valuations relative to global equities do look stretched, absolute P/B (price-to-book) at 1.8 times is still below the historical average of two times.Prospects for further inflows into Asian equities remained substantial. This is because global portfolios continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds.While short-term consolidation was expected before the next leg up, it did not anticipate a deep correction as valuations, although now (July 2009) above historical norms, were not excessive.
Going forward, re-rating potential, earnings recovery, and improving return on equity should drive further upside in the equity market before valuations become overly stretched. Expecting earnings to recover in the next 12 months (July 2009 – July 2010).Asia earnings forecasts were gradually moving northwards after having fallen 44% from the peak and bottoming out at end-February 2009. Nevertheless, it is also important that investors choose a specific strategy when it comes to picking stocks to buy. Buying stocks that were inexpensive either on a price-to-book value or trailing price earnings ratio basis was always, and under all conditions, a good investment strategy in Asia. Stocks with low value of future growth (VFG), which measures the price paid for the stock against its future earnings growth are of favoured.However, investing in Asian equity markets was not without risks. There were concerns on whether the level of credit growth was sustainable, failing which it could miss its gross domestic product (GDP) growth target. An improvement in consumer confidence and stock market activities should hopefully bring about a resumption in consumer spending globally. This is by no means assured as we continue to see job losses, while credit availability is impaired, and energy prices are rising again.However, hopeful that government stimulus packages and easing interest rates would take effect in the second half 2009. The lagged recovery in the US, Japan and Europe should hopefully help to sustain the Asia-led global recovery.
By Groupama Asset Management, Palatine Asset Management and Standard Life Investments ….
The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index. When developing nations last commanded a premium, the 22-country benchmark sank 54% in the next year.The disparity means investors are paying too much for shares from China to India to Brazil at a time when the global economy is contracting. MSCI’s emerging-market gauge is valued at 1.7 times its companies’ net assets after a 34% surge last quarter (2Q2009), the highest on record compared with the MSCI World Index of 23 advanced economies, which trades for 1.5 times.Emerging-market stocks are at risk.Investors are already starting to show a lack of confidence in a continued rally. The MSCI developing-nation index dropped 8.3% from its 2009 high on June 1 2009 through early July 2009, while the MSCI World fell 7.4% and the S&P 500 retreated 6.8%. Emerging-market funds had US$540 million of net outflows in the week to July 8 2009, the second time in three weeks investors withdrew money.While developing nations’ economies grew an average 1.7 times faster than developed countries in the past 20 years, their stocks traded at a discount because their economies and returns were more volatile.
The MSCI emerging-market index had 13 bull-market rallies of at least 20% and 12 bear-market declines of the same magnitude since its inception in December 1987. That compares with five bull markets and four bear markets for the S&P 500 during the same period.
By Mark Mobius …
It is targeting emerging market consumers and commodities as its investment themes.With consumers, there’s simply more of them in the emerging markets (than the rest of the world), and they shop. The potential for sales of new products, in markets such as China and India, is tremendous.
Equities markets were in a very bullish trend now (Aug 2009) and cheap emerging market stocks presented attractive investments. Commodity prices, which had retreated since record highs last year (2008), would trend upwards, judging from the recovery in prices. We will continue to see lots of fluctuations, but the trend will be going upwards.
Confidence in emerging markets was on the rise, as shown by emerging market bond yields over US treasuries, which were shrinking. Confidence in emerging markets is increasing, and don’t see an end to that anytime soon.
However, a risk to emerging markets included inflation, as central banks would have a natural inclination to hike interest rates and that would dampen interest in equities and debt markets.He was upbeat about the outlook for corporate earnings next year (2010), describing the way ahead as “very, very bright”, as the downturn forced companies to be cautious on costs and expenses, which would boost profitability.
Companies would report disappointing results but there would be a recovery next year (2010), leading to very impressive percentage increases in earnings, which would in turn, drive optimism higher.On the continuing stream of “bad news” about the global economy, this was “looking through the rear view mirror.” However, he expected more good news, while stock market prices would also be a good indication of an economic recovery.In the emerging markets, stock prices are up, in tandem with expectations earnings will improve.
The illiquid nature of the local stock market continues to be a problem for foreign investors as they prefer more robust markets, but the bigger challenge is the Government’s reform agenda.
Malaysian stock market was not the only market facing the illiquidity problem; other markets in the region, except Hong Kong, did too. The big question or challenge is the reform agenda of the current administration and it is very encouraging that Prime Minister Datuk Seri Najib Razak has called for the formation of regional markets but for that to happen we need reform in the foreign exchange mechanism.
The current (Aug 2009) bullish equity market is expected to continue on more positive news flow going forward.
Most governments around the world are concerned about deflation, so they are injecting liquidity into the market. However, cautioned that there would be a correction at some point.
The banks have (also) started to lend again and suggested that central banks set a quota on how much they could lend to ensure banks continue to lend. Central banks can also lower the reserve requirements for banks and lower the interest rate. If banks want to continue to make a margin, they have to continue to lend.
Mobius said the best time to invest is when you have the money. The consumer and commodities sectors were the two main investment themes at present (Aug 2009).
There had been recovery in commodity prices and that commodities would continue to see some upside fluctuations.
f. What’s NEXT (2H2009) For The Malaysian Equities Market …
The local market has risen sharply but may run a little ahead of fundamentals.
Cash holdings of fund managers remained high at 2.85% of their portfolios versus the long-run average of 2.4%. This may suggest that investors remain cautious about the rally .Liquidity is a big factor presently (July 2009) supporting the performance of stock prices,
Although pent-up demand and ample liquidity may provide support for a surprise on the upside in the latter part of the year (2009), macroeconomic fundamentals will have to catch up before the markets can move to a higher level on a sustainable basis.
The FBM KLCI has risen 20.7% in the first-half (1H2009) and has factored in to a large extent improvements in the global economy and rising corporate activities but the easy money has been made and the market may be more challenging in the second half 2009.
Potential risks that may disrupt the positive momentum include a more severe outbreak of the A (H1N1) flu and worse-than-expected economic or financial data coming from the US or Europe.
Although Malaysia’s valuations were not cheap compared to regional peers, the local market remained attractive as it was less volatile, with stocks which have predictable and sustainable earnings.
Expecting 3Q2009 to be fairly quiet and range-bound pending more evidence of improvement in macroeconomic fundamentals before the next push higher.
The next leg of market re-ratings would be earnings-driven set against a backdrop of still-healthy liquidity conditions. The upcoming (local) 2Q22009 earnings season will be an important indicator of current conditions.
Relative to the region, Malaysia’s valuations were not as compelling as its regional peers due to higher price-to-earnings ratios and lower growth rates with low trading liquidity.
Meanwhile, with Wall Street stuck in a range since May 2009, the start of the second-quarter 2009 earnings season (July 2009) could prove to be a decisive factor for determining how much faith investors should have in an economic recovery.
After a rally of as much as 40% for the S&P 500, on expectations the economy will begin to turn around by the year-end (2009), analysts will hone in on companies’ projections to see if their hopes are corroborated.
It will be range-bound and going to stay there for a while. What will probably break it is going to be the earnings season because the expectation is for at least some rebound in earnings.
Investors will be looking for companies to release results that are “less bad” in the same way that recent economic data have spurred optimism that the worst is over.
But the real spotlight will be on what companies foresee for the rest of the year (2009). Forecasts of profitability and improving consumer demand would increase optimism that the US economy is finding its footing. Companies would have to signal the economy was actually improving and investors would not be impressed if they were just cutting costs and slashing jobs, as had been the case in recent quarters.
By Tan Teng Boo … Aug 2009
The FBM KLCI is expected to increase between five and 10 per cent from the current level (Aug 2009) by year end (2009).Tan is also projecting the FBM KLCI to reach 1,500 points within two years (2010 – 2011) depending on the economic development in the country as well as globally. As long as Malaysia does not face major political calamities, the longer-term outlook for Bursa Malaysia remains positive.
On the global economic outlook, Tan believed the global economy led by China has begun a V-shaped recovery and the current (Aug 2009) rally the beginning of a new bull market. The global economy is facing a secular boom with cyclical inflation.He also believed the global economic contraction in the last three quarters (Oct 2008 – June 2009) was not due to the US sub prime or mortgage problems. Analysis showed that global economic activities contracted only after the collapse of Lehman Brothers on September 15, 2009. In the last twelve months (Aug 2008 – July 2009), the global economy impacted by the US-led financial crisis, went through a very turbulent period, leaving investors totally confused.
By Areca Capital Sdn Bhd … Aug 2009
Fund managers still see value in equities although the local stock market has charged into its fifth month of rally.
Prices for some stocks are a little ‘toppish’ now (Aug 2009) but think there’s room for earnings growth when real economic recovery kicks in and the improvement would help bring valuations down again.
Economists believe faltering global markets may have already bottomed. However, global economies would not see any sustainable recovery until at least next year (2010).
The gradual economic recovery in the US, the biggest import market for most Asian nations, as well as local funds flushed with cash should provide a buffer to a severe correction in the local market.
The fund manager is adopting “cautiously optimistic” stance and will do some stock-picking if the market drops although don’t expect anything major. At this moment (Aug 2009), it invested mainly in blue chips which are liquid.
It maintained that the market would trend upwards “strongly” in two to three years (2010-2011) after the global mess had been sorted out.
By Fortress Capital Asset Management (M) Sdn Bhd … Aug 2009
The FBM KLCI has gone up 41% since mid-March prompting it to re-evaluate his investment strategy. It had trimmed his invested funds from some 90% to about 60% (Early Aug 2009).
They are adopting a cautious short-term stance and have sold ahead of the full release of corporate results. The selldown was to evaluate whether the recent slew of earnings upgrades by brokerages was reasonable or not.
By MIDF Asset Management … Aug 2009
Emerging economies risk experiencing another blow to economic progress given the build-up of stock market bubbles if systemic risks that brought about the economic crisis are not addressed. Regional markets have been picking up steam since the end of March 2009 on the back of positive economic data and pent-up buying demand. Expectations of greater liquidity in the system from government fiscal stimulus spending have also buoyed market expectations.
It warned that much work was needed to address the systemic risks exposed by the present economic crisis. Liquidity alone does not wash away the problem. Restoring credit lines is essential but to spend at that kind of pace, cutting interest rates to near zero and allowing banks to lend aggressively is scary.Ironically, the build-up of debt and credit spending that’s happening now (July 2009) was what occurred in the US after the tech bubble popped in 2000. The situation could become as pernicious as in the US today (2009) if risks in the economy were not addressed. Economic data from the first half of 2009 had shown marked improvement, but there was noindication that this kind of recovery was sustainable. Moreover, countries needed to work to transform their economic model because the export-based model was no longer viable.All emerging markets are dependent on exports to developed markets, but the demand is no longer there, leaving a void. There is compelling evidence that they will not come back anytime soon. China and India can eventually fill that hole, but that will take time.This has not stopped market investors from riding on the theme of recovery, however. Market valuations have risen concomitantly with improving economic data, so much so that valuations, at least on Bursa Malaysia Securities, are reaching the high end of the historical trading range.The increase has prompted some quarters to raise the red flag of a speculative bubble that may be forming on global equity markets.
The benchmark FBM KLCI was trading at 20.49 times price to earnings (PE) on late July 2009, according to Bloomberg data. Bursa’s normalised valuations range from 10 to 20 times PE, with the latter representing peak valuations. The FBM KLCI’s 20.49 times PE ratio was a five-year high, after reaching a low of 9.26 times on Oct 24, 2008. Indonesia’s Jakarta Composite Index valuations also neared a five-year high last Friday at 28.56 times, recovering from a low of 6.77 times on Nov 21, 2008. Singapore’s Straits Times Index, which was revamped in January 2008, also hit its record high last Friday, trading at 16.19 times PE. Hong Kong’s Hang Seng Index, which was valued at 18.55 times PE, neared its five-year high of 20.34 times PE, which was last seen in 2007. That markets were close to the peaks suggested that investors were expecting corporate earnings to match pre-crisis levels. However, chances were slim that the systemic risks exposed by the crisis had all been completely erased more than a year after the crisis first broke out.By all accounts, the present rally (March 2009 – July 2009) is being driven by liquidity, but that could not go on forever.
By AMResearch … Aug 2009
Markets were outrunning the economy as equity investors were pricing in a recovery in 2010.
Markets are outrunning the economy, but that’s happening everywhere. The market usualy prices ahead the economy by between six and nine months. The markets are growing to reflect expected potential earnings from next year (2010) even as economies are still contracting.It expects the markets to take corrective measures at some point and based on previous bear market rallies, to correct by between 15% and 22%.
By RAM … Aug 2009
Although a recovery was imminent, it would not be V-shaped — meaning no sudden surge after the trough. Moreover, the global economy was not out of the woods yet.
Developed countries that contribute more than 60% of global output are still in recession, but it is important to note that the recovery process has begun. There are signs that we are on an uptrend, but it is also a slippery slope due to massive wealth destruction. As long as credit flows are subdued, there might be a relapse in the US and European economies, which could trickle down to us.Though no bubble had developed in key markets, it did not mean that one would not form. In Malaysia, we have not exhibited the classic symptoms of a bubble such as supply outstripping demand, a steep decline in prices and an excess of 20% increase in credit growth over a lengthy period of time.But often with bubbles, you don’t know you are in one until it pops, and this is an innate failure of the capital markets.
By OSK … Aug 2009
Malaysian stocks, trading near a one- year high, face the risk of an “Edwardian Summer” that may end with a “crash” as shares are overvalued amid shrinking earnings.As with any Edwardian Summer, the longer it lasts, the more out of touch it gets with its fundamentals, and the greater the crash at the end.
Investors should sell “into strength” and buy selected shares.OSK likened the market’s outlook to the “Edwardian Summer” in the UK during the reign of King Edward VII from 1901 to 1910. The Edwardian era was regarded as a romantic golden age of long summer afternoons, garden parties and big hats immediately prior to the First World War.The stock index is trading above 17 times 2009 earnings, higher than the average of 15 times since 2000. Companies in the index were trading at 15.5 times in 2006 and 2007 when earnings growth was averaging 30 per cent growth. With earnings set to shrink in 2009 and grow at only 12 per cent in 2010, the current price to earnings multiple is “excessive”.
By Jupiter Securities … July 2009
The current (July 2009) liquidity run may push the benchmark index beyond the 1,200-point level “soon” but concerns are mounting that the market may have become too expensive. It (the index testing 1,200) could be as early as August 2009.
There’s a lot of money out there in search of returns in the current low-interest rate environment.
At current levels, the market was priced at 17 times price-earnings to 2009 earnings, which was the level reached during the bull run in 2007. Valuations are looking a bit too rich.
Since the start of July 2009, the index has risen some 9%, extending the rally which started in April 2009. Year-to-date, it has surged more than 30%.
The liquidity run will carry into the next month or so; (and) any correction should be ‘gentle”
By Merrill Lynch … July 2009
The next six months (July 2009 – Dec 2009) will still present buying opportunities in equities regardless of it being an extended bear market rally or the start of a new bull market.With green shoots appearing, you’re thinking what can you do now (July 2009). Is it the start of a bull market or an extended bear market rally? Right now (July 2009), what it is saying is that it is okay (to go bullish on global equities) over the next six months. They are very positive on equities.Recommending buying growth stocks in emerging markets, with his favourite picks being consumer, infrastructure, automotive and financial counters.We are starting to see recovery numbers in emerging markets in terms of car sales.
Emerging markets would continue to outperform developed markets for as long as China’s growth expectations remained “fairly positive”. China is the key to economic and stock performance moving forward.However, strong corporate earnings growth would be needed to support equities’ current valuations.
We are in the middle of 2Q2009 earnings season and so far, earnings are coming in ahead of expectations, driven by financial and technology companies.
Fund managers had raised cash in early July 2009 and increased their exposure to global equities. Their cash level has gone up from 4.2% to 4.7% (of total portfolio). This is positive, in the sense that they are increasing cash and liquidity.On the macro level, expecting global economic recovery in the second half of the year (2009) and acceleration in gross domestic product (GDP) growth in 2010.
We see will more clarity as to whether it is a V-shaped or W-shaped economic recovery after six months (Till Dec 2009).A sustainable economic recovery is based on mostly consumer spending and not so much corporate capital expenditure.It is very optimistic about a China-led economic recovery, noted that consumers in the world’s largest economy, the United States, were still highly leveraged against the backdrop of a high unemployment rate.Although US consumers had raised their savings to 8% of total income, the percentage has to be double-digit before consumers could start spending again.
It does not expect corporate capital expenditure to “return” soon. The US factory capacity utilisation rate stood at 68%, with a third of factories remaining inactive.
By Macquarie Research … July 2009
Regional markets continued to rise on late July 2009, driven by high liquidity but equities may have run ahead of fundamentals. Liquidity was returning to Asia and global emerging markets.
The fund flow numbers for later July 2009 showed that liquidity returned to Asia, ex-Japan and global emerging markets with net weekly inflows of US$973.2 million (RM3.41 billion) and US$1.1 billion, respectively. This reversed the net outflow trend of the early July 2009.
Greater China (China, Hong Kong and Taiwan) funds saw their biggest inflows since December 2007 (US$213.3 million), adding that sentiment towards China remained positive, with investors looking to achieve a broad and diversified exposure.
The market conditions continue to be driven by liquidity rather than fundamental factors. Importantly, foreign investors are not the only source of liquidity. Domestic sources were also playing an important role, as depositors were switching from time deposits to demand deposits.
Interest rate differentials between time and demand deposits are narrowing. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (demand deposits).
While liquidity conditions were often a function of economic fundamentals, in the very near term there was the obvious potential for more money to chase equities despite what it viewed as elevated valuations.
The yield gap between the earnings yield and the deposit rate expanded to an historical high. Despite elevated valuations, the significant yield differential between equities and bank deposits could induce investors to continue to switch from bank deposits to equities.
Retail participation could rise further. The low returns on alternative investments, such as bank deposits, as well as the strong market momentum, were two likely drivers of the increase in retail investor participation.
The strong liquidity was pushing Asian equities to stretched valuation levels. It thinks a strong recovery in global final demand is now (July 2009) priced in.
While hard signs of demand recovery are absent, it would ‘lean into’ the current (July 2009) rally, progressively reducing beta as equity markets move further and further away from levels justified by economic fundamentals.
On Malaysia, the yield gap, which it defined as 12-month forward earnings yield minus demand deposit rate, had widened further. “Admittedly, the domestic monetary base could be the next potential source of liquidity driving up the market.
By CIMB … July 2009
It maintains an 'overweight' call on Malaysian equities with a year-end (2009) index target of 1,220
It remains bullish on the near-term outlook of the local stock market but it is in overbought territory now (July 2009).It is, once again, a test of buyers' conviction and optimism on the market. Meanwhile, maintain its bullish view towards the near-term market.
Foreign funds stayed net buyers in Malaysia for a third straight month in June 2009, but the amount of net inflows (US$25.6 million) was smaller than that in April and May 2009.
Malaysia was the most heavily sold down market in the region. Regional markets closed mostly lower yesterday, led by China (-5.8 per cent), on weak company earnings and lower commodity prices.
By Schroders … July 2009
It underweight on Malaysia for equities for now (July 2009) although that might change in the future as opportunities start to open up due to announcements of the latest stimulus packages.The RM67 billion ringgit stimulus package that’s been announced, coupled with the relaxation of rulings for investment provides positive investment opportunity over the longer term.
By Corston-Smith Asset Management Sdn Bhd … July 2009
Risk appetite has gone up to go back into investing. Now is a period of stock picking, and watching to ensure that the macro numbers really start to improve.
If commodity prices go up, equity markets will follow suit. While inflation or rising consumer prices was not a problem at the moment, rising crude oil prices would spur inflation.
Commodity traders have indicated that global inflation could rise next year (2010), fuelled by government spending and debts. A larger supply of US dollar in the market, for example, will weaken the greenback. As crude oil is transacted in US dollars, a weaker US currency makes the commodity more attractive to global traders, hence, higher demand and prices for the hydrocarbon resource.
By Bank of America Merrill Lynch Research … July 2009
The global economy is deemed to have seen the worst. The global recession had ended in the second quarter of the year (2009) and a fragile recovery had started in the third quarter 2009.
An inflection point in the world economy should prompt investors to rebalance their portfolios to reduce cash and increase their equity portions. At economic inflection points, equities should be favoured, not cash. So would be to structurally reduce cash in favour of equities.
Equities have already staged a strong recovery from their bear market lows. And in developed markets expecting to see big, fat trading ranges prevail over the medium term.
By Kumpulan Sentiasa Cemerlang Sdn Bhd … July 2009
Foreigners do invest a little in Malaysia, not so much on its appeal, but because of its laggard attributes.
While we’re not seeing a very strong recovery, things are also not getting worse. Malaysia is not that important a market. China and Hong Kong will still dominate.
Markets are now swarmed with liquidity. With nearly US$24 trillion spent on global bailout plans, there’s a lot of liquidity sitting in the system. This is boosting the market including ours. Many fund managers will be forced to participate as the market continues to rise.
By Inter-Pacific … July 2009
Positive re-ratings on corporate earnings could be in the second half (2H2009) of the year even though results in the coming quarter would be less than attractive, in tandem with the sluggish economic performance.The driving factors would be firm commodity prices, improving confidence from the domestic stimulus measures, brighter spots in exports and positive wealth effects. Thus, expecting upgrades owing to a correction from overshot downgrades or improving demand.With interest rates at historical lows and banks flush with liquidity and availability of credit, the scope for asset inflation to emerge remained high. Should asset inflation come into play, it would revive confidence in government policies. At the moment this is missing. If delay in implementation continues, it will curtail confidence and further dampen spending.While the KLCI was trading at mid-cycle price earnings (PE) and might not entice foreign investors anytime now, it would be tough for them to ignore Malaysia especially if the regional valuation trended higher than Malaysia.Local institutions and retail players will continue to sustain the market levels, thus providing the positive momentum. This despite the disconnection between market valuation that is at mid-cycle level and the ailing economy. So long as there is continued inflow from the domestic institutional funds, it is unlikely for the market to correct significantly.Earnings upgrades are in the pipeline and valuation gap vis-a-vis regional market narrows.The big push would likely come from the inflow of funds, foreign funds could have been caught from a sharp equity market rebound mainly due to domestic buying in the second quarter of 2009 (2Q09).As such, possibilities for foreign buying can emerge when valuation becomes more attractive vis-a-vis regional market.Asian equity markets look more promising over the longer term but short-term indicators and macroeconomic fundamentals will need to be firmer first before regional bourses start to make a more sustainable climb.
Money continues to flow into Asian equity markets with second quarter (2Q2009) funds flow totalling US$12.7bil, the largest quarterly inflow since 2001, in stark contrast to outflows of US$4bil in Q4 of 2008.
By Prudential Fund Management … July 2009
The local market has risen sharply but may run a little ahead of fundamentals.
Although pent-up demand and ample liquidity may provide support for a surprise on the upside in the latter part of the year (2009), macroeconomic fundamentals will have to catch up before the markets can move to a higher level on a sustainable basis.
The FBM KLCI has risen 20.7% in the first-half (1H2009) and has factored in to a large extent improvements in the global economy and rising corporate activities but the easy money has been made and the market may be more challenging in the second half 2009.
Potential risks that may disrupt the positive momentum include a more severe outbreak of the A (H1N1) flu and worse-than-expected economic or financial data coming from the US or Europe.
It is reasonable to expect a consolidation in the next few months (July 2009 & Beyond).
Although Malaysia’s valuations were not cheap compared to regional peers, the local market remained attractive as it was less volatile, with stocks which have predictable and sustainable earnings.
Since Malaysia has seen the largest net outflow in the region especially in recent months, with improving relative valuations, we may see some potential asset allocation to our markets.
By Credit Agricole Asset Management … July 2009
The regional markets have had a brilliant run with the MSCI Asia Pacific ex-Japan index rising 31% while the FBM KLCI rose 23% in 2Q2009.
It is therefore reasonable to expect a consolidation in the next few months (July 2009 & Beyond) while expecting 3Q2009 to be fairly quiet and range-bound pending more evidence of improvement in macroeconomic fundamentals before the next push higher.
The next leg of market re-ratings would be earnings-driven set against a backdrop of still-healthy liquidity conditions. The upcoming (local) 2Q22009 earnings season will be an important indicator of current conditions.
Relative to the region, Malaysia’s valuations were not as compelling as its regional peers due to higher price-to-earnings ratios and lower growth rates with low trading liquidity.
Regional fund managers have their focus on China, India and Indonesia. These economies have the strongest domestic growth stories in Asia.
It remains positive over the local bourse’s medium to long term performance following the recent liberalisation measures announced by the government. The abolishment of the affirmative action policies is a significant step in addressing Malaysia’s competitive challenges. Whilst the benefits are unlikely to be felt immediately, it is a step in the right direction and sends a positive signal to the market.
By Mark Mobius … dated July 2009
The outlook for emerging markets remains positive to their relatively strong fundamental characteristics and faster growth than their developed counterparts.
While some emerging economies contracted in early 2009, most are expected to return to positive growth by end-2009 or 2010. In the face of the global economic slowdown, the major markets of China and India continue to record exceptionally robust growth rates. China and India are expected to grow by 8% and 6%, respectively, in 2009.
Emerging economies are in a much stronger position to weather external shocks following the accumulation of foreign exchange reserves.
The growing middle class in emerging markets is an important and strong contributor to growth. Emerging markets account for more than 80% of the world’s population, providing them with a strong purchasing power and the ability to spend their way into growth. At the forefront are markets such as China, India and Brazil.
Another area that is poised to support economic growth in emerging markets is investment, particularly in infrastructure. This is another area in which we have seen governments boost public spending in markets such as China and India. More importantly, the current (July 2009) valuations of emerging markets remain attractive.
g. Factors That Could Derail The Global Economic Recovery …
Those in the financial circle are now (July 2009) accustomed to the phrase "green shoots" to describe signs of a possible turnaround in the global economy. The term came into prominence after US Federal Reserve Bank chairman Ben Bernanke, in his interview in March this year (2009), used it to describe the nascent economic revival in the US following the worst recession in almost three decades that nearly pushed the world to the brink of economic collapse in September 2008. Fortunately, aggressive government intervention globally had averted the collapse.Looking across the globe, there are encouraging signs of economic recovery
Nevertheless, some economists are mulling over factors that could derail the recovery process given the gravity of recent economic crisis which is nowhere comparable to usual economic downturns in its impact.In the US, rising bond yields are causing worries among policymakers that mortgage rates — normally tied to long-term bond yields — are creeping up. The average 30-year fixed mortgage rate which fell to below 5% recently has climbed by 61 basis points to 5.42%, causing possible delay in the recovery of the housing sector.The steady rise in bond yield reflects the fear of a possible return of inflation which is premature at this juncture, judging by drastic declines in manufacturing capacity utilisation as well as in consumer spending.Secondly, as a result of the massive destruction in household wealth in the US from almost US$63 trillion (RM221.76 trillion) at its peak in 2007 to US$50 trillion recently, a quick recovery in consumer spending is almost unlikely. In the first quarter 2009 alone, an estimated US$1.3 trillion worth of household wealth evaporated. The snail pace expansion in private consumption will no doubt delay the recovery process as consumers have been a major force behind the US economy. Thirdly, a steady increase in commodity prices has raised concerns that various infrastructure projects planned by governments under their fiscal stimulus packages will hit speed bumps as escalating costs delay their implementation. Fourthly, Asian exports may not be able to make a quick U-turn from current (July 2009) levels. Although downward pressure has somewhat dissipated in recent months (March – June 2009), the weakening of the US dollar would mean stronger Asian currencies which may dampen export competitiveness.
In addition, owing to a lag effect, the weakness in the eurozone and Japanese economies will bite into Asian exports in the near term. At the same time, although Asian economies are banking on China’s recovery, China’s domestic demand may not be strong enough to absorb their exports at this juncture.Finally, concerns over possible downgrade in sovereign ratings may push some countries to prematurely focus on trimming budget deficits, which in turn, alter growth trajectories in the medium term. Budget deficit is only a means to an end and is not the only factor that determines a country’s economic fundamentals. It cannot be seen in isolation from other macroeconomic matrix. However, critics said that concerns over budget deficit are overblown especially at times like this. Yes, budgetary position should be properly monitored but as Nobel laureate economist Joseph Stiglitz puts it, properly planned budget deficit can strengthen long-term economic fundamentals.
h. Carry Trades Are Making A ComeBack Into Emerging Markets
After being in the doldrums the past year (2008), risky carry strategies are slowing making a comeback and asset managers are taking advantage.
Strategists and portfolio managers were optimistic about global economic prospects and are starting to make minor bets on higher-yielding currencies in emerging markets.
Risk appetite is clearly on the mend. As a result, "carry trades are slowly creeping up, although asset managers are getting selective. Right now (July 2009), they're going into emerging markets."
Carry trades refer to strategies that involve borrowing in a low-yielding currency such as the yen and dollar and investing in higher-yielding assets. These trades were crushed after the global economy plunged into recession in the middle of last year (2008), followed by the collapse of U.S. investment bank Lehman Brothers in September 2008.
Investors sold their holdings of riskier assets at the height of the financial crisis and sought shelter in the dollar and yen. That started to change, however, after March 2009 as investors waded back into carry trades. Carry strategies have garnered returns of about 4.5 percent since the beginning of 2009 after being hammered in 2008.
Carry trades would definitely go outside G10 currencies.
*************************
The Carry Trade Is Roaring Back … This Time The US Dollar! … dated April 2009
Deepening US Recession Linger For Years Will Keep IR Low … A Recipe For A Dollar Carry-Trades !!!
A deepening U.S. recession and near-zero interest rates could trigger a sell-off in the currency later this year (2009). The dollar could be weakened by a downturn that could linger for years, keeping U.S. interest rates low.
A slide in the dollar could be aggravated if it turns into a currency used to fund "carry trades." In such trades, an investor sells a borrowed currency with comparatively low interest rates and aims to profit by investing in higher-yielding currencies.
The U.S. will be stuck in this (recession) for a couple of years, probably another two. The dollar would be the mother of all carry trades.
It is believed that not the United States that would lead the world back to recovery, but China, which, was already showing signs of life (March 2009). As it rebounds, China could attract foreign inflows currently parked in U.S. assets.
For now (March 2009), the yen is keeping its status as the main funding currency for these transactions, as Japan's benchmark interest rate is 0.1 percent. That has contributed to the yen weakening around 7 percent against the dollar so far this year (2009).
Though the U.S. Federal Reserve benchmark target rate is near zero, the dollar has strengthened about 8 percent in 2009 as foreigners seek shelter in U.S. government-backed assets such as Treasury securities in turbulent times.
The dollar had already rallied nearly 10 percent last year (2008) amid a broad liquidation in cross-border assets by U.S. institutional investors, spooked by worries about deteriorating financial and economic stress.
But a dollar sell-off could be the next phase of a carry trade revival as it becomes apparent that the recession is likely to be deeper than many initially thought, with soaring U.S. job losses and plummeting exports.
A possible carry trade would be shorting the dollar against Chinese yuan deliverable forwards, or short-term derivatives contracts, now (March 2009) yielding 3 to 4 percent. That yield should hold as China keep interest rates steady, with its central bank saying it needs more data before it can ease monetary policy again.
China's current benchmark rate is 5.31 percent, compared with the Fed's target rate of between zero and 0.25 percent.
Other carry trade beneficiaries versus the dollar would be resource-rich emerging market currencies, where rates are still above 4 percent in many countries.
To be sure, no one is keen on selling the dollar at the moment (March 2009), with investors too scared to go anywhere else. But if things deteriorate further in the United States and the government's stimulus measures take time to bear positive results, things could turn bleak for the dollar.
One of the things that could hurt the dollar is Washington's stimulus plan, which is inflationary in the long term at a time when the economy is contracting.
Hundreds of billions of dollars in U.S. deficit-financed spending could build a foundation for a modest recovery but, if history is any guide, it will take time before the job market finds a bottom. That should ensure U.S. rates will stay low for some time, giving ammunition for carry traders.
Meanwhile. the carry trade is making a comeback after its longest losing streak in three decades. Stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher.
Using dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 percent from March 20 to April 10 2009, that trade’s biggest three-week gain since at least 1999.
Now (April 2009) efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities. The global economy seems to have reached an inflection point. We’re set for a period of some classic risk currency trades, where you sell the dollar against emerging-market currencies.
Carry trades use funds in countries with lower borrowing costs to invest in those with higher rates, allowing investors to pocket the difference. Speculators fled the strategy last year (2008) as central banks cut rates to revive growth, narrowing spreads, and as currency swings increased risks. Foreign- exchange volatility expectations surged 73 percent in three days to a record on Oct. 24,2008.
Borrowing U.S. dollars at the three-month London interbank offered rate of 1.13 percent and using the proceeds to buy real and earn Brazil’s three-month deposit rate of 10.51 percent rate would net an annualized 9.38 percent, as long as both currencies remain stable.
Carry trades were profitable for most of the past three decades (1980 – 2000s)). They produced average annual returns of 21 percent in the 1980s with no down years.
In the 1990s, carry-trade investors suffered three down years, including a 54 percent slide in 1992. From 2000 to 2005, the trade was again on top with average gains of 16 percent. Then it dropped three years in a row in 2006-08, the longest streak since 1976-78, for an annualized average loss of 16.5 percent through Feb. 28 2009. Most of the decline came after June 2008 as the collapse of U.S. subprime mortgages froze credit markets and led to the bankruptcy of New York-based Lehman Brothers Holdings Inc., the biggest corporate failure in history.
As investors fled to the safest assets, the greenback climbed 26 percent between July 15 and March 4 2009, when it reached its highest in almost three years. Prices for Treasuries rose, sending the 10-year note yield to a record low of 2.0352 percent on Dec. 18, from 4.07 percent on Oct. 14 2008.
On March 2009, the carry trade roared back.
Smaller swings in foreign exchange are making the carry trade less vulnerable to a sudden wipeout. Currency volatility expectations fell to a six-month low in April 2009 from Oct. 24 2008’s record.
There are increasing signs that FX volatility has peaked. It is Time to Reconsider Carry”. The conditions are about to fall in place to make carry strategies attractive again.
The risk is that global economies will continue to shrink, leading investors back to the most-traded currencies -- dollars, yen and euros -- and forcing emerging economies to reduce benchmark rates to encourage growth, narrowing interest spreads.
Meanwhile, critics said that despite the rebound in global equity markets and signs that the currency swings have ebbed on increased optimism that the global financial downturn has eased, it is too early for carry trade to make a comeback. In order for the carry trade to make a turnaround, there are three conditions to be met.
· Firstly, volatility must come down.
· Then, we need to be in an environment where the market is calmer, better risk appetites and there is a sustained improvement on the economic data released by each nation.
· Lastly, we need to be in an environment where central banks are talking about raising interest rates and not cutting them.
So far, there is no indication that the three conditions would be met anytime soon.
Nevertheless, indices tracking currency volatility showed that the volatility had been reduced. The JPMorgan Chase & Co benchmark index on investors’ expectations for currency swings had tumbled to 14.4% from 27% October 2008 while the JPMorgan G7 Volatility Index had declined as well by 31% since mid-January 2009.
Prior to the meltdown of the global financial system, the carry trade, which involved borrowing yen or US dollar at low interest rates, to fund the purchase of high-yielding assets was a popular investment theme.
However, the turmoil in financial markets saw investors scrambling to unwind carry trades as asset prices plunged, sending the yen sharply higher. Against the dollar, the yen has risen 11% since the fall of financial services firm Lehman Brothers Inc in mid-September 2008.
The performance of equities was important for carry trade and many opined that pump-priming plans by various nations and low interest rates had boosted investor confidence in emerging markets.
Even Goldman Sachs Group Inc has begun to recommend carry trades, which had fallen out of favour in 2008 as investors took flight to US Treasuries. There were growing signs that the forex volatility had peaked. The conditions are about to fall in place to make carry strategies attractive again.
i. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).
Threat Of High Commodities Prices …
The prices of commodities, from crude oil to industrial metals, have risen more than 50% since a rally that began in March 2009. There is concern that if prices continue on their upward trajectory, unsupported by a parallel improvement in economic fundamentals, the fragile recovery that is taking place could be threatened, causing an even more protracted global recession. Malaysia, even though it is a major exporter of crude oil and crude palm oil, is just as vulnerable.
The bottom was reached in 1Q2009, and if not, then in 2Q2009. That is the good news because we have gone through the first six months of 2009 and therefore, have rode out the worst of the recession.
The not-so-good news is that the turning point is still elusive, with visibility being muddied by the rally in commodity prices, particularly crude oil. Since March 2009, most commodities have seen their prices climb more than 50%.
Still, compared to May 2009, economists are now (June 2009) more confident about saying the worst could be finally over. It is good enough we have seen the worst, but warns that recovery will be subdued. We believe the worst is behind us, going by some tentative signs of stabilization in the pace of decline in global indicators.
However it may too early to celebrate because a new threat to global recovery has emerged in the form of rising commodities prices.
The rally is being driven primarily by the combination of a weakening US dollar and expectations of a rebound in global economic growth.
It is not the best of times for commodities, especially crude oil, to start to run ahead of fundamentals when the economic environment is still so weak.
A rally in commodity prices when the global economy was showing concrete signs of recovery would not have caused concern because it would reflect a pickup in demand and business activity. Herein lies the crux of the matter – the worst could be over for the global economy but conditions remain weak and a recovery is still fuzzy. There are also pockets of vulnerability.
Given that unemployment and income have yet to improve significantly, businesses and consumers will rein in spending, which will dampen growth.
In a nutshell, purchasing power is still being stifled by weak economic conditions. Thus, if prices continue to soar to pre recession levels and stoke inflationary pressures, the nascent signs of recovery, now (June 2009) popularly referred to as green shoots could be very quickly nipped.
If crude oil surpasses US$100 a barrel in 2009, the recovery will be in trouble.
It is a double whammy because on the one hand, rising commodity prices will drive up the cost of production at a time when manufacturers are still trying to fund their feet and demand is still sluggish.
On the other hand, to dampened inflationary pressures, central banks may have to tightened monetary policy by raising interest rates, which in turn will increase the cost of funds for businesses.
For the man in the street, there will be less money in the pocket because the cost of servicing their loans would go up.
When prices begin to drive up inflation when the economy is still in recession mode, economic management becomes more difficult because raising interest rates is not the best policy option in such an environment most concur.
Companies will be squeezed both ways – an erosion in margins, which is difficult to pass through because demand has collapsed.
At this point in time (June 2009), rising commodity prices and inflation are not a major concern. This is because prices are still far below the record levels reached in 2008, before the global recession caused by a free fall. More importantly, the consensus is that prices are unlikely to return to those levels any time soon because the rally is not supported by fundamentals.
The rebound in prices seen today (June 2009) us due partly to restocking of inventories that had been run down since 2007 and a correction form the distressed selling seen in 2H2009. It is not a return 2o 2008 anomalies, but a return to normality.
However rising commodity prices go hand in hand with an improvement in Asia’s exports. Asia’s downturn lasted six months…it is now (June 2009) a big driver of global growth.
As long as the hike does not lead to inflation building up, it still not pose a threat to recovery. The rally is due to the huge amount of liquidity in the system.
With the rally being driven by a weakening US dollar that has delinked prices from underlying economic fundamentals. Market forces will cap the rise and investors should remain cautious.
Morgan Stanly says that inflation is not an immediate concern over the next 12 months (June 2009 – June 2010). Global inflation rates, after threatening to hit the stratosphere in 2008 because of high crude oil and other commodity prices, have been stabilizing since the recession took hold of the world economy.
Thus, given the still low inflation risks, economists are ruling out the need for central banks to raise rates anytime soon.
Be that as it may, economists want that the risk poised by rising commodity prices should not be ignored, particularly if they run too far ahead of fundamentals. It is a symptom of other ills … the massive quantitative easing exercises that have been implemented by the major economies to stimulate growth.
Now (June 2009), when things improve, the huge amount of money that has been printed and pumped into the system will come home to roast.
While rising crude oil will boost export earnings and government revenue, one must not forget that Malaysia’s fuel subsidy bill is still substantial despite attempts to bring it down.
For now (June 2009), the rise in commodity prices has not reached levels that set off warning bells. Economists and industry players take comfort. In the fact that the rally is happening amid signs of stabilization in the world economy.
Threat Of US Dollar Crisis …
Some economists say it is a depreciating US dollar, not raising commodity prices that could pose a threat to global economic recovery in the coming months (June 2009 & Beyond).
A global currency crisis sparked by a crumbling US dollar may sound like a very remote possibility for now (June), but the scary part is that of late, such talk has begun to gain traction against the backdrop of the weakening greenback.
Jim Rogers sounded this warning: A currency crisis is imminent, opining that the US dollar is a flawed currency.
The root of the concern is the US ballooning budget deficit and the massive quantitative easing that has been implemented to ease the credit crunch as a result of the banking crisis and to stimulate growth.
At some point down the road when economic recovery gathers strength and speed, this printing of money will come back to haunt the economy in the form of higher inflation and a devaluation in the currency.
For now (June 2009), such concerns take a back seat to reviving growth.
Indeed while rising commodity prices could be a threat to global recovery if not accompanied by an improvement in economic fundamentals, it is the US dollar that bears watching in the months ahead (June 2009 & Beyond).
The US dollar experienced three difficult months (Early March – early June 2009). Coincidentally, it was also in March 2009 that commodity prices started rallying.
A Us dollar under siege will not be good for the world economy, given that it is the currency for trade. It therefore is to everyone’s advantage to keep the greenback stable.
A US dollar crisis will not help global recovery, as it undermines investor confidence in US treasuries.
The issue that is getting a lot of attention is whether the dollar’s weakness is a natural result of global recovery or if it is due to massive amount of funds that have been pumped into the system by the quantitative easing exercise.
Indeed it is the combination of both. What is closer to the truth is that the US dollar lost its safe heaven status as a result of the global recovery. A clearer picture will emerge in 2010 on how low the US dollar will go.
Detractors warn that if the US Fed does not have a good exit strategy insofar as QE is concerned, mismanagement both in terms of strategy and timing could well spark the next currency risks. And if that happens, the contagion will be far greater than that seen in the 1997/1998 Asian financial crisis that was sparked by the devaluation of the Thai bath.
History shows two periods that saw a devaluation in the US dollar. The first was in 1971 when the Bretton Woods system collapsed and the world move to a floating exchange rate system after it became clear that the supply of gold and US dollar was not sufficient to support growth in world trade. The second was in the 1980s, with the signing of the Plaza Accord that resulted in another devaluation of the US dollar, especially against the Japanese yen.
Those who are less worried that a dollar crisis is looming pointed out that it is not just the US that has implemented QE. Developed economies , including Japan, Switzerland and the UK have all implemented QE while the European Central Bank is in the midst of considering such a move. Other central banks pursued QE: therefore in relative terms, the US dollar will not depreciate sharply.
So, once again, the world will have to confront the threat posed by the US dollar as the US continues to incur massive budget and trade deficits.
Indeed, some economists see the currency crisis as the third stage of a global crisis that begun with the US subprime mortgage debacle. The early warning signs are already here – rising bond yields, a depreciating greenback and rising commodity prices.
j. Beyond 2Q2009 Corporate Earnings
Malaysia's biggest companies fared poorly in the recently concluded January-March 2009 reporting season, but are optimistic that earnings will recover towards the year-end (2009).
Most companies reported lower profits as global recession weakened demand for their goods and services. The government also thinks the economy could contract as much as 5 per cent this year from an earlier 1 per cent forecast. But the government also expects the economy to turn the corner in the fourth quarter 2009.Expecting a recovery of corporate earnings, the numbers should be better. There's more likelihood that companies may surprise on the upside.With the economy showing signs of recovery, with the government pump-priming and serious about making it work, it can help to boost consumer confidence.
Despite a bumpy start to the year with 1Q09 corporate earnings released in May 2009 that are by and large weak, analysts are expecting financial results for corporations in the upcoming second quarter (2Q2009) to fare better.
Beyond 2Q2009, the general consensus is that further improvements can be seen in the second half (2H2009) of the year. Most people are expecting a stronger 2H2009. Expecting a lot of news flow in the current 2Q2009 and the results will be translated into numbers come August 2009. Investors are already looking ahead into the fourth quarter 2009 and 2010. You can see from the positive aura in the market currently (May – June 2009)) that investors anticipate things to pick up then.On the 2Q2009 financial results, there would be a year-on-year contraction but there shall be improvements on a quarter-on-quarter basis. The 2Q2009 might have more upgrades than downgrades as expectations have bottomed. In the 1Q2009, there were more downgrades than upgrades but the ratio improved a lot. It was much worse in 4Q08, where the ratio was 0.23 times for upgrade versus downgrade, which means for every upgrade, there were four downgrades. That has improved significantly to about 1 for 3. Moving forward, the ratio may improve 1 to 1. It will also depend on business segments. For example, those in the ports business or cargo and trade related should see improvement in 2Q2009, as 1Q2009 for them was quite bad. Those in the consumer related sector could see some lag factor. So far, there is an improving trend from 1Q2009 numbers for airlines, trade and electricity demand. The general consensus is that 2H will be better than 1H2009.Most economic indicators were suggesting that the worst decline was over in 1Q2009. Although we are not out of the woods yet, prospects are better for imprved survival of companies that were facing a tough 1Q2009. The 2Q2009 will be better than the 1Q. Although we may still see some softness in the next couple of months (June 2009 & Beyond), it will not be that severe as before. What we are seeing now (June 2009) is that the freefall has eased off and we are now (June 2009) in between the stabilisation and recovery phase. Although the global economy was at the recovery phase, given the severely of the global recession, recovery “will likely take some time”. It will take awhile before the world economy resumes and stage a modest recovery. We have bounced off the bottom. That bottom was in 1Q2009 and some of the 2Q2009.
The simultaneous rollout of fiscal and monetary packages will provide some support to ensure the global economy can stage a weak and mild recovery, which we will likely begin to see only in 2010. What we are seeing now (June 2009) is that demand will likely be fragile as well as weak for the remaining months of 2009 (June – Dec 2009)But all indicators are suggesting that 2H2009 performance for both economies and companies will see some improvement compared to 1H. For those that have managed to weather the storm thus far, the good news is that further job losses and company bankruptcies will likely ease off in the coming months (June 2009 & Beyond).Any real sustainable recovery will only come when the developed economies showing more sustainable growth in terms of consumer demand and prices of asset, particularly houses. We are already seeing stimulus packages in China having positive effect in stimulating demand.
Refer To The Malaysia Equities Outlook 2.1
Stock Market Leading Performance Indicator
5 (0-3-Bearish 4-6-Neutral 7-10-Bullish).
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