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Wednesday 9 September 2009
How much more upside is possible?
Here’s an interesting question that punters must surely be asking: how much more upside can there be in stocks, either for the rest of the year or the next 12 months?
Here’s an interesting question that punters must surely be asking: how much more upside can there be in stocks, either for the rest of the year or the next 12 months?
Several brokers have, over the past few weeks, issued their Straits Times Index targets for the next 12 months (among them UBS Investment Research, DBS, Credit Suisse and Citi Investment Research) and there seems to be a loose consensus that falls between 2,900 and 3,000 points.
Since earnings are, shall we say, not very prominent, many have resorted to using comparisons with historical book values to arrive at their targets. Whatever the case, it’s worth noting that if 3,000 is the highest forecast for the next year, then upside from the present 2,622 over the next four months must be relatively modest.
Contrarians on the other hand, might point to the present penny stock fever and large jump in liquidity as signalling an overheated market, which is arguably also indicative of a market top. Some might even argue that if everyone expects something to happen, then it probably won’t.
Investment firm Schroders’ September 2009 Talking Point pointed out that since March 9, developed markets have rallied about 55 per cent while emerging markets have risen about 75 per cent, largely on hopes and expectations of an economic recovery. As a result, Schroders attempted to answer the question of what we can expect from markets and economies during recovery from recessions. Its conclusions certainly give food for thought.
Schroders found that during most recessions in developed markets (mainly the US), the market drops modestly and then recovers before the end of the recession. The exceptions were 1974, 1981 and now, because these three were probably structural as opposed to cyclical recessions and as a result, the dives and subsequent bounces were greater.
‘The one thing that stands out . . . that we see as being fairly constant - the number of months before the end of a recession that the market turns up is fairly consistent at about four months. By that measure, the US National Bureau of Economic Research should mark the end of this recession at about July 2009 although they usually take several months to reach a conclusion,’ said Schroders.
‘The general observation is that in most cases, the best returns are seen in the few months before the recession ends and returns are more muted after it ends.’
The exception to this was 2001, when deflationary concerns overrode recovery expectations, leading Schroders to conclude that upside for developed markets may be limited from here on and that investors should watch out for signs of deflation.
It did however, say that it believes that the downturn suffered by emerging economies is more cyclical and not structural and so emerging equity markets should outperform developed markets.
Interestingly, Bank of America-Merrill Lynch said in its Sept 4 Asian Macro Navigator that Asia’s high savings rate and heavily-managed, undervalued currencies have helped foster imbalances that led to asset bubbles at home and abroad, the most notable among the latter being the US housing bubble. The investment bank concluded that unless foreign exchange regimes change, the next bubble that Asia sees will probably occur at home.
Although China was not identified explicitly, there’s enough to suggest that there is where the next bubble will be - if it already hasn’t been inflated.
There’s not a lot more that can be added to our two previous columns where the recommendation was to adopt a ‘buy the dips and sell into strength’ strategy, largely because of the current over-dependence on a bloated China market for direction. The US market too, bears close watching because there is the likelihood that its best gains are already past if the government declares the recession as being officially over.
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How much more upside is possible?
By R SIVANITHY
07 September 2009
Here’s an interesting question that punters must surely be asking: how much more upside can there be in stocks, either for the rest of the year or the next 12 months?
Several brokers have, over the past few weeks, issued their Straits Times Index targets for the next 12 months (among them UBS Investment Research, DBS, Credit Suisse and Citi Investment Research) and there seems to be a loose consensus that falls between 2,900 and 3,000 points.
Since earnings are, shall we say, not very prominent, many have resorted to using comparisons with historical book values to arrive at their targets. Whatever the case, it’s worth noting that if 3,000 is the highest forecast for the next year, then upside from the present 2,622 over the next four months must be relatively modest.
Contrarians on the other hand, might point to the present penny stock fever and large jump in liquidity as signalling an overheated market, which is arguably also indicative of a market top. Some might even argue that if everyone expects something to happen, then it probably won’t.
Investment firm Schroders’ September 2009 Talking Point pointed out that since March 9, developed markets have rallied about 55 per cent while emerging markets have risen about 75 per cent, largely on hopes and expectations of an economic recovery. As a result, Schroders attempted to answer the question of what we can expect from markets and economies during recovery from recessions. Its conclusions certainly give food for thought.
Schroders found that during most recessions in developed markets (mainly the US), the market drops modestly and then recovers before the end of the recession. The exceptions were 1974, 1981 and now, because these three were probably structural as opposed to cyclical recessions and as a result, the dives and subsequent bounces were greater.
‘The one thing that stands out . . . that we see as being fairly constant - the number of months before the end of a recession that the market turns up is fairly consistent at about four months. By that measure, the US National Bureau of Economic Research should mark the end of this recession at about July 2009 although they usually take several months to reach a conclusion,’ said Schroders.
‘The general observation is that in most cases, the best returns are seen in the few months before the recession ends and returns are more muted after it ends.’
The exception to this was 2001, when deflationary concerns overrode recovery expectations, leading Schroders to conclude that upside for developed markets may be limited from here on and that investors should watch out for signs of deflation.
It did however, say that it believes that the downturn suffered by emerging economies is more cyclical and not structural and so emerging equity markets should outperform developed markets.
Interestingly, Bank of America-Merrill Lynch said in its Sept 4 Asian Macro Navigator that Asia’s high savings rate and heavily-managed, undervalued currencies have helped foster imbalances that led to asset bubbles at home and abroad, the most notable among the latter being the US housing bubble. The investment bank concluded that unless foreign exchange regimes change, the next bubble that Asia sees will probably occur at home.
Although China was not identified explicitly, there’s enough to suggest that there is where the next bubble will be - if it already hasn’t been inflated.
There’s not a lot more that can be added to our two previous columns where the recommendation was to adopt a ‘buy the dips and sell into strength’ strategy, largely because of the current over-dependence on a bloated China market for direction. The US market too, bears close watching because there is the likelihood that its best gains are already past if the government declares the recession as being officially over.
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