UBS: The rally ain't over

I am doubtful.



INVESTORS WHO missed out on the market rally in recent months look like they will get their chance to get into the game with the current market correction.

And it’s not a downtrend. In fact, the rally ain’t over, according to UBS Research in a report dated yesterday (June 15).

4 reasons offered by UBS analysts Tan Min Lan and Ling Vey Sern:

* Firstly, valuations are still 10-15% below mid-cycle. Banks and properties should still benefit, although the sectors’ dramatic outperformance against telcos (c65% in 3 months) should wane the next 3 months.

* Secondly, key indicators are still surprising on the upside – May Purchasing Managers' Index crossed 50, while hiring intentions for 3Q09 turned positive unexpectedly. IBES earnings per share upgrades now exceed downgrades for second straight month.

* Thirdly, idle balances to market cap remain in a range consistent with a positive market. Demand deposits (checking accounts that pay zero interest) hit a high of 24% of market cap in Feb-09.

With the market rallying 63%, the ratio has dropped to c17%, but still above peaks of 13-14% in Sep-92, Mar-98, and Mar-03, which marked the start of previous market rallies.

* Fourthly, household wealth has fallen just 5% in 2008 despite what remains the deepest recession on record.

“Taken together, we reiterate our view that the market should trade to its midcycle value which implies an index level of 2,650 on the FSSTI by mid-2010,” according to UBS.

“In the absence of negative data points in the form of renewed growth weakness, rising inflation or withdrawal of policy easing, we think it is premature to judge the rally over.”


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