Monday, 21 September 2009
Investors should stay long, but stay nimble
Chart watchers would no doubt be busy this week fine-tuning their analyses of the Straits Times Index with the key questions being whether the buying of the dips will continue and if so, would they eventually be strong enough to ensure the 2,700 mark is convincingly reclaimed.
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Investors should stay long, but stay nimble
By R SIVANITHY
21 September 2009
Chart watchers would no doubt be busy this week fine-tuning their analyses of the Straits Times Index with the key questions being whether the buying of the dips will continue and if so, would they eventually be strong enough to ensure the 2,700 mark is convincingly reclaimed.
Logically, because there is no reason to expect much negative economic data in the weeks ahead - even if there was to be any, government spin doctors and central bankers would likely shift into overdrive to ensure that the impact is minimised - the answer to the first question has to be that the buying of the dips will surely continue and it can only be a matter of time that liquidity and momentum propel the index above 2,700.
Helping this process along will be an increasing number of optimistic reports that essentially say ‘buy Asia’ such as DBS Group Research which in its Sept 17 Q4 outlook said Asia’s V-shaped recovery continues unabated.
‘We do not subscribe to W-shaped scenarios for the US or Asia, especially the latter,’ said DBS. ‘In short, we never regarded this downturn as a garden variety recession, rather a ‘shell-shock’ arising from the Lehman Brothers debacle and several one-off factors related to China, and have always looked for the sharp rebound that is now under way.’
However, as pointed out in last week’s column, signs of frothiness abound. In an oblique manner this was the point of DMG & Partners’ ‘sell’ on the Singapore Exchange last Wednesday, when it said that current valuations are not cheap and interest may not be sustained.
DMG pointed out that value per unit traded in July and August was 79 cents, down from $1.08 on SGX’s 2008 financial year and the 94 cents in its 2009 financial year.
‘Historically, penny stocks were the last to move in an upmarket. We are not optimistic that equities market trading volume will stay high in the months ahead,’ said DMG. To be sure, the value per unit traded has not risen much in recent days, with the figure still well below $1.
And what of earnings? Here, diverse views can be found.
Citi Investment Research in its Global Equity Strategist report of Sept 16 said global 12-month forward earnings expectations have risen almost 10 per cent since May and it looks like markets have entered the recovery phase of the profits cycle.
‘The clearest signs of a recovery in forward earnings are in emerging markets,’ said Citi.
It added that earnings momentum strategies tend to struggle around turning points and to gain exposure to the cyclical earnings recovery, investors should do so through sectors, not regions.
However, Morgan Stanley in its Sept 17 Asia/Global Emerging Markets strategy said the earnings upgrade momentum is likely to be nearing a peak and that the bulk of the impact on EPS (earnings per share) growth rate forecasts are likely to have already happened.
‘The pickup in the intensity of earnings revisions have translated into significantly better bottom-up earnings growth expectations . . . but we would expect further upside to aggregate bottom-up EPS growth rate forecasts to be limited even if revisions remain in positive territory, as we approach levels similar in magnitude to those seen in previous earnings recoveries,’ said MS.
The upshot of all this is that while investors should probably look to stay long, they should also stay nimble and be on the lookout for a significant market turn and loss of momentum
Equities have risen, on average, by 50 per cent in six months mainly because of concerted government-provided liquidity from Washington to Beijing, and many observers know that the withdrawal of this support could derail the recovery.
In this regard, it’s interesting to note the results of a global fund manager survey by FTI Consulting reported last week - the majority of respondents said the crisis is not over yet because the amount of leverage in the system has not yet diminished.
‘The prevailing view was that there has been so much economic stimulus that markets cannot help but go up. The concern was what would happen when government money runs out,’ said FTI.
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