Radical measures please investors, but recession or worse is still ahead
Nick Westra 15 October 2008
Equity markets have surged from Hong Kong to Hungary this week as investors rallied behind global market rescue plans and hoped that one of the worst crashes in history could become a distant memory.
Markets have responded so far this week, but observers warn that the road to recovery could be a long one.
“What happened in the past few days showed the European governments have arrived on time to save the patient from dying,” said Credit Suisse chief regional economist Tao Dong, who referred to the global financial system as the patient. “But the patient is not leaving the hospital tomorrow, not to mention being able to run soon.”
Coming off a global meltdown last week, governments and central banks have united by throwing open their vaults and pumping liquidity and extending lifelines to a financial system frozen by credit concerns.
European governments committed €1.1 trillion (HK$11.5 trillion) in a co-ordinated effort to restore confidence in interbank lending. In a separate move, the British government announced it was investing £37 billion (HK$390 billion) in three of the country’s four biggest banks, gaining a controlling stake in one. Yesterday, the US government also said it would take equity positions totalling US$250 billion in US banks, using money from the massive bailout plan approved last month by Congress.
“Finally, the measures that have been taken are beginning to gain some traction,” said Nicholas Toovey, regional head of equity at ING Investment Management. “Certainly the equities market would tell you that, as they have responded well over the last couple of days.”
Hong Kong also took steps to boost confidence in the city’s banks. The government announced yesterday that it would offer unlimited deposit protection until the end of 2010. The Hong Kong Monetary Authority said it would deploy foreign exchange reserves to back deposits.
“What Hong Kong did is amazing, because there is not much of a threat here,” said Khiem Do, the head of Asian multi-asset investment at Baring Asset Management. “But this will shore up confidence for bank depositors in a big way, in a really big way.”
The collection of government and central bank initiatives seem to be making some headway in thawing the credit freeze on the financial system. The three-month US dollar London interbank offered rate (Libor) - the interest rate banks charge each other on loans - fell the most since March yesterday, dropping to 4.64 per cent from 4.75 per cent on Monday.
“What has happened over the last two days is that the depression or deflation scenario has been minimised and perhaps we are going back to the recession scenario,” Mr Do said. “The doomsday scenario has been cancelled out in the short term.”
With the storm easing up, bargain hunters may start to look for value after the previous few weeks of devastation cut valuations in the local market down to the lowest levels in about a decade.
“Confidence has been restored and people are looking ahead for better days,” said Francis Lun Sheung-nim, a general manager at Fulbright Securities. “Investors think that the worst is over.”
Mr Lun said that the equity rally could be sustainable in the near term and the Hang Seng Index may test the 18,000 level.
Some investors may also believe that the Hang Seng Index is close to bottoming, having fallen 39.48 per cent so far this year and 46.8 per cent from last year’s peak on October 30. Those losses move well beyond bear market territory, which is commonly defined as a 20 per cent decline from the peak.
“The bear market is creating value, and at some point value becomes compelling,” Paul Pong, head of the Pegasus Fund, said on Monday.
Investors might start by looking at resource plays because they were among the hardest hit in recent weeks. After being targeted on concern that an economic downturn would cut into demand, the energy sector has held up this week.
Crude oil futures advanced to US$81.19 in New York on Monday after slipping below US$80 on Friday for the first time in a year.
Oil companies CNOOC and PetroChina have fuelled buying interest, surging 21.53 and 15 per cent respectively so far this week.
And buying interest in the overall local market also seemed to be robust compared with recent levels. Mainboard trading turnover topped HK$80 billion yesterday for the first time in more than three weeks.
But while there are signs suggesting that the markets have turned the page on last week’s disaster, most observers say there are more chapters to come in the financial crisis.
“An economic downturn will be the next thing that investors, businesses and individuals will all be focused on,” Mr Toovey said. “It will affect investors, businesses, and individuals in lots of different ways and it will take some time to work through different economies.”
The US economy already seems to be in a deep slowdown, mired under mounting job losses and a deteriorating property market. Major European markets have also noted slowing growth. Waning consumer demand in key developed markets could spell trouble for Asia, which relies on export growth for revenue.
The mainland’s export growth is down from 25.7 per cent last year to 22.3 per cent so far this year, according to Bloomberg data.
But observers also noted that robust domestic consumption and vast currency reserves would help the region weather the storm.
“Sitting here and now, it is difficult to see a situation that Asia really falls off a cliff, goes into recession, and stays there for the next several months or years,” said Bratin Sanyal, head of Asian equity investments at ING Investment Management.
1 comment:
Is the Worst Over? Don’t Bank on it
Radical measures please investors, but recession or worse is still ahead
Nick Westra
15 October 2008
Equity markets have surged from Hong Kong to Hungary this week as investors rallied behind global market rescue plans and hoped that one of the worst crashes in history could become a distant memory.
Markets have responded so far this week, but observers warn that the road to recovery could be a long one.
“What happened in the past few days showed the European governments have arrived on time to save the patient from dying,” said Credit Suisse chief regional economist Tao Dong, who referred to the global financial system as the patient. “But the patient is not leaving the hospital tomorrow, not to mention being able to run soon.”
Coming off a global meltdown last week, governments and central banks have united by throwing open their vaults and pumping liquidity and extending lifelines to a financial system frozen by credit concerns.
European governments committed €1.1 trillion (HK$11.5 trillion) in a co-ordinated effort to restore confidence in interbank lending. In a separate move, the British government announced it was investing £37 billion (HK$390 billion) in three of the country’s four biggest banks, gaining a controlling stake in one. Yesterday, the US government also said it would take equity positions totalling US$250 billion in US banks, using money from the massive bailout plan approved last month by Congress.
“Finally, the measures that have been taken are beginning to gain some traction,” said Nicholas Toovey, regional head of equity at ING Investment Management. “Certainly the equities market would tell you that, as they have responded well over the last couple of days.”
Hong Kong also took steps to boost confidence in the city’s banks. The government announced yesterday that it would offer unlimited deposit protection until the end of 2010. The Hong Kong Monetary Authority said it would deploy foreign exchange reserves to back deposits.
“What Hong Kong did is amazing, because there is not much of a threat here,” said Khiem Do, the head of Asian multi-asset investment at Baring Asset Management. “But this will shore up confidence for bank depositors in a big way, in a really big way.”
The collection of government and central bank initiatives seem to be making some headway in thawing the credit freeze on the financial system. The three-month US dollar London interbank offered rate (Libor) - the interest rate banks charge each other on loans - fell the most since March yesterday, dropping to 4.64 per cent from 4.75 per cent on Monday.
“What has happened over the last two days is that the depression or deflation scenario has been minimised and perhaps we are going back to the recession scenario,” Mr Do said. “The doomsday scenario has been cancelled out in the short term.”
With the storm easing up, bargain hunters may start to look for value after the previous few weeks of devastation cut valuations in the local market down to the lowest levels in about a decade.
“Confidence has been restored and people are looking ahead for better days,” said Francis Lun Sheung-nim, a general manager at Fulbright Securities. “Investors think that the worst is over.”
Mr Lun said that the equity rally could be sustainable in the near term and the Hang Seng Index may test the 18,000 level.
Some investors may also believe that the Hang Seng Index is close to bottoming, having fallen 39.48 per cent so far this year and 46.8 per cent from last year’s peak on October 30. Those losses move well beyond bear market territory, which is commonly defined as a 20 per cent decline from the peak.
“The bear market is creating value, and at some point value becomes compelling,” Paul Pong, head of the Pegasus Fund, said on Monday.
Investors might start by looking at resource plays because they were among the hardest hit in recent weeks. After being targeted on concern that an economic downturn would cut into demand, the energy sector has held up this week.
Crude oil futures advanced to US$81.19 in New York on Monday after slipping below US$80 on Friday for the first time in a year.
Oil companies CNOOC and PetroChina have fuelled buying interest, surging 21.53 and 15 per cent respectively so far this week.
And buying interest in the overall local market also seemed to be robust compared with recent levels. Mainboard trading turnover topped HK$80 billion yesterday for the first time in more than three weeks.
But while there are signs suggesting that the markets have turned the page on last week’s disaster, most observers say there are more chapters to come in the financial crisis.
“An economic downturn will be the next thing that investors, businesses and individuals will all be focused on,” Mr Toovey said. “It will affect investors, businesses, and individuals in lots of different ways and it will take some time to work through different economies.”
The US economy already seems to be in a deep slowdown, mired under mounting job losses and a deteriorating property market. Major European markets have also noted slowing growth. Waning consumer demand in key developed markets could spell trouble for Asia, which relies on export growth for revenue.
The mainland’s export growth is down from 25.7 per cent last year to 22.3 per cent so far this year, according to Bloomberg data.
But observers also noted that robust domestic consumption and vast currency reserves would help the region weather the storm.
“Sitting here and now, it is difficult to see a situation that Asia really falls off a cliff, goes into recession, and stays there for the next several months or years,” said Bratin Sanyal, head of Asian equity investments at ING Investment Management.
Additional reporting by Denise Tsang
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