Friday, June 1, 2012

Market Analysis -- 1st Jun 12

As we move into the last month of 1H2012, nothing has changed for past 2 months in term of global events and global stock markets were on a selling down trend due to the current global events.  These global events still circle around Europe, US and China.

1. Europe, Greece's election in April failed to form a Government and as such they are going to do another election in June and concern now are on whether who will win the election to form the Government and will Greece exit Euro and default.  The next much talk about is Spain.  With recent Spanish Government bailout of Spanish banks and international pressure on should Spain seek international bailout piled up further pressure on the EU region.  Most of the EU nations are in recession due to the EU debt crisis as a consequence of the steep austerity measures being implemented last year.  With that several EU nations have changed of leadership and the with prominent being the French President.  Austerity vs Growth is the new and urgent issue facing all EU leaders.  There is in need to stimulate growth to prevent further deepening of recession and at the same time the austerity measures still need to be in place to cut the debt.  Measures or policies that balance the 2 have to raise and implement and that will be the priority task for the end of June EU Summit.  All EU leaders in agreement and consensus in need to stimulate growth and maintain/relax austerity measures is the basic requirement and outcome from the Summit.  Positive development from that meeting should bring confidence back to investors.  With steps to stimulate growth and that will help to cushion the pressure on Italy and Spain ( the 2 too big to fail nations in EU ).  Lately, news of EU nations having contingency plans for a Greece's exit and default appeared to fear global stock markets.  That news should not appear to be negative.  Any project management or planing will always come with contingency plan and that is a backup or put a stopper to the downside risk.  Should EU nations do not have contingency plans then if Greece really exit and default, it will be too late to pick up the falling pieces.  Investors should watch and monitor closely the development towards the EU Summit in end June and that could be a game changer to the current global stock markets.

2. US economic data has been sluggish lately in particular the job data.  With US Fed Operation Twist going to expire in June, investors are speculating whether there will be another stimulus in this coming US Fed meeting near end June.  The so-called QE3 should not be able to do much to save the job markets (both QE1 and QE2 failed) and problem in US is more on the political disagreement in order to cut the nation debt and create jobs.  Should the lawmakers be able to get their act together and compromise, US economy will not till now still in stalling mode and have to rely on stimulus to hang on.  US economy is not how many stimulus program it can roll out and keep printing of money can rectify but the ultimate attitude of the US lawmakers ability to put nation interest ahead of political party interest.  Just have an advice for those who seek analysts' claims that US stocks are cheap, be cautious, there are couple of bubbles forming in US, namely, bond bubbles, tech bubbles ( yes the dot.com bubbles in early 2000) to name a few.

3. China, economic growth has been slow but still above the Government's forecast as this was the result of continuous tightening for past 2 years to curb rising inflation ( all thanks to the large-scale stimulus rolled out during the 2008 crisis and US keeps printing money for nothing that does nothing to help its economy ).  China inflation has come down to below the 4% target set by the Government and with external shock factors from EU and US further add on to the old export driven economic model, this has caused the economy to slow down without any doubt.  Chinese Government realized that and is shifting its economy model to consumer based (service based) so as to less dependent to external factors.  This new model will not create that kind of double-digit GDP growth any more but should provide a better cushion to external shocks.  China is starting to ease monetary policies with 3 cut of bank reserve ratio within the past 6 months and they still yet to lower interest rate.  As such, analysts are anticipating more easing from the Government.  This is not speculating as even Premier Wen Jiabao already stressed China will focus on growth.  The problem is most analysts expecting huge stimulus package from China and China to save the rest of the world that kind of action.  Just have to say sorry, there will not be such an act from China.  China will ease monetary policies to selective sectors and having past 2 years of fighting high inflation, China will not want to going back to those days again at this moment.  If you have read China history, you should know the Chinese mentality.  Chinese never has the ambition to conquer the world since 3000 years ago ( except Yuan Dynasty which was ruled by Mongolian but Mongolian are not Hans origin ).  The prosperous period of Tang, early Song and Ming dynasties if you read the history their aims were just to want to make the rest of the world know the presence of China (with all those silk road and sea trades to the East and West ).  China as of now still have the same mentality, they want the world to know the presence of China economy as one of the powerhouse and not wanting to be a superhero to save the world.  Hence, any attempt to think of any China stimulus could rally global stock markets will have to think twice.  What is important to China is looking after itself more important than saving the world.  The social unrest if happens in China is not something to joke with.

For long-term investors that focus just solely in the local market ( and it is better to do so ) have you ever wonder why those Government linked corporations years after years and regardless of good or bad economy periods, still able to consistently paying out good dividend ?  The answer is obvious but shall not openly disclose as do not want to get into any legal action.  If you understand the rationale behind that, you might want to consider investing in those.  Over a long period of times, the dividend collected should be able to even out your investment and turn to profit.  Note long period of times is not just 3 years, 5 years, etc.  It will be in multiple of 10 years type of range.

What's to expect in the month of June.  Mega events, Greece's re-election in mid June, EU Summit end June and US Fed FOMC at end June.  Watch out for development in particular EU on austerity vs growth topic and will not be surprised there will be a panic selling down prior to reversal to the global stock markets.  Focus on the game changer events and focus on the valuation of those strong fundamental stocks.

When you have the extreme fear inside you, it is the time to hit the buy.

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