Short-term still positive but gains will be harder

Published April 5, 2009

SINGAPORE - Two weeks ago this column recommended traders stick to the main indices because of the likelihood they would be window-dressed, while last week's column argued that there would be a short-term boost to equity markets from improved liquidity, momentum and probably economic data but that this will not last for long.

The first part of those predictions have come to pass - in three weeks since touching 1,456 on March 9, the Straits Times Index has risen exactly 25 per cent.

The second is of course, has yet to materialise but we have little doubt that it will because the present approach to solving the global crisis is via 'quantitative easing' whose aim, as one expert observer dryly remarked, is 'to re-energise economic activity so that society can in effect borrow itself out of debt' .

This, it has to be said, must be counterintuitive to even the most dense of bulls.

Leaving aside for a moment the absurdity of this logic, it should also be equally obvious that a Ponzi-like scheme which calls for the printing of trillions upon trillions of dollars to try and provide the necessary re-energisation is surely not a foundation for a proper recovery because it will inevitably lead to even bigger problems down the road.

Still, if enough politicians, central bankers and brokers - all of whom failed to detect the impending collapse of the banking system ahead of time and should actually be held culpable but are not - claim that their efforts are working, then an oversold market, desperate for even the smallest glimmer of hope, can be expected to react in the way it has over the past few weeks.

Throw the G20 summit into the mix where the leaders made all the right soothing, public relations noises while indulging in the expected back-slapping, then we have the perfect trigger for massive short-covering as well.

Did the G20 really accomplish anything other than promises? Maybe a little, but certainly not as much as the market's reaction would have everyone believe. As Straits Times' Jonathan Eyal pointed out over the weekend, much of the money that was promised had already been pledged before so there was little incremental improvement, while key issues were not addressed, such as how exactly are banks' toxic assets to be written off.

As for what the weeks ahead hold in store for equities, our take is pretty much the same as last week with slight modification - there is enough liquidity and momentum built up to provide some support, but upside from here is going to be much more difficult because as noted earlier, the STI has shot up 25 per cent in three weeks, a nice round figure that would give chart watchers the perfect excuse to recommend taking some money out of the market. In addition, the speed of the rise has come without any sign of improvement in the underlying economy.

This point was made by DMG & Partners in its 2Q Strategy report: 'Singapore's economic outlook is anything but rosy...the economic figures look ugly in the first quarter but we expect a further slide in the second. We forecast the economy to contract by 7.2 per cent in 2009..'

On the stock market, DMG said it is too premature to buy aggressively. 'Judging from previous crises, equity markets will likely see a recovery in 3Q09, a quarter following the worst GDP reading and six months preceding the first quarter of positive growth'. Its fair value for the STI is 1,814, though it thinks a fall to 1,380 is still possible.

Finally, for the bulls who place their faith in 'experts' like investment bankers, brokers and regulators who all contributed to the economic crisis, here's something to ponder - according to World Bank estimates, the global economic crisis will cause an additional 22 children to die per hour, throughout all of 2009.

And that's the best-case scenario. The World Bank says it's possible the toll will be twice that: an additional 400,000 child deaths, or an extra child dying every 79 seconds.

'In London, Washington and Paris, people talk of bonuses or no bonuses,' Robert Zoellick, the World Bank president, said this week. 'In parts of Africa, South Asia and Latin America, the struggle is for food or no food.'


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